Question

Larson Manufacturing is considering purchasing a new injectionmolding machine for $250,000 to expand its production capacity. It will cost an additional $20,000 to do the site preparation. With the new injection-molding machine installed, Larson Manufacturing expects to increase its revenue by $90,000. The machine will be used for five years, with an expected salvage value of $75,000. At an interest rate of 12%, would the purchase of the injection-molding machine be justified?

Answer 1

The project is viable as the net present value is positive. The project yields even more than the cost of capital

Step-by-step explanation:

for the cost of the mahcine we must include all the cost for leave it ready to use.

So, we add the purchase and installation cost:

250,000 + 20,000 = 270,000 investment cost.

revenue of 90,000

time of 5 years

and salvage value of 75,000 at the end of useful life.

Present value of the salvage value: present value of a lump sum

`(Salvage )/((1 + rate)^(time) ) = PV`

Salvage 75,000.00

time 5.00

rate 0.12

`(75000)/((1 + 0.12)^(5) ) = PV`

PV 42,557.01

Present value of revenues: will be considered ordinary annuity

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 90,000

time 5

rate 0.15

`90000 * (1-(1+0.15)^(-5) )/(0.15) = PV\\`

PV $324,429.86

Net present value:

present value of inflow less present value of outflow:

324,429.86 + 42,557.01 -270,000 = 96.986,87‬