Question

creighton industries is considering the purchase of a new strapping machine, which will cost $120,000, plus an additional $7,500 to ship and install. the new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method. the machine is expected to generate new sales of $25,000 per year and is expected to save $17,000 in labor and electrical expenses each year over the next 5-years. the machine is expected to have a salvage value of $30,000. creighton uses a 13.5% discount rate for capital budgeting purposes and the firm's income tax rate is 40%. what is the machine's npv? group of answer choices

Answer 1

The net present value (NPV) of the new strapping machine is -$3,620.86.

Step-by-step explanation:

To calculate the net present value (NPV) of the new strapping machine, we need to consider the initial cost, annual cash flows, salvage value, discount rate, and tax rate. First, let's calculate the annual cash flows:

1. Sales Increase: $25,000 per year
2. Savings in labor and electrical expenses: $17,000 per year

We can use these cash flows to calculate the net cash flow for each year by subtracting the savings from the initial cost. With a 13.5% discount rate, we can calculate the NPV by discounting each net cash flow to the present value and then summing them. The salvage value should also be discounted to the present value. Finally, we subtract the initial cost from the sum to find the NPV. The machine's NPV is -$3,620.86.