Question

A manufacturer is considering replacing a production machine tool. The new machine would cost $3700, have a life of four years, have no salvage value, and save the firm $500 per year in direct labor cost and $200 per year indirect labor costs. The existing machine tool was purchased four years ago at a cost of $4000. It will last four more years and have no salvage value at the end of that time. It could be sold now for $1000 cash. Assume money is worth 8%, and that the difference in taxes, insurance, and so forth, for the two alternatives is negligible. Determine whether or not the new machine should be purchased

Answer 1

The new machine should not be purchased.

Step-by-step explanation:

initial outlay = -$3,700 + $1,000 = -$2,700

cash flow years 1-4 = $700

discount rae = 8%

Using a financial calculator, the NPV = -$381.51

Since the NPV is negative, the new machine should not be purchased.