Question

You are considering adding a new item to your company’s line of products. The machine required to manufacture the item costs $15000, and it depreciates straight-line over 4 years. The new item would require a $6000 increase in inventory and a $3000 increase in accounts payable. You plan to market the items for three years and then sell the machine for $2500. You expect to sell 2500 items per year at a price of $5. You expect manufacturing costs to be $2 per item. If the tax rate is 33% and your weighted average cost of capital is 10.5% per year, what is the net present value of selling the new item?

Answer 1