Question

Management of a corporation is considering buying the following equipment as part of the strategic plan...

Management of a corporation is considering buying the following equipment as part of the strategic plan to increase market share.

Equipment: Model HX1256

Price: $225,000

Salvage Value: 0

Installation Costs: $75,000

Depreciation: Straight Line method (Cost-Salvage Value/Number of Years)

The machine should bring $100,000 in new sales revenues for its first year of operation. After that, sales are expected to grow at a rate of 10% a year for the next 5 years. Total Costs and expenses (not including depreciation) will be $40,000 for the first year, and they will increase at a rate of 5% for the next four years. Management believes that the rate of return on this project should be 15% due to the risks involved. No net working capital will be required during the project life.

Using the NPV and IRR, decide if the new machine is a good investment.

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Answer #1

NPV and IRR both are negative for the investment. So, it is not a good investment.

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