A company is considering the acquisition of production equipment which will reduce both labor and materials costs. The cost is $ 110, 000 and it will be depreciated on a straight-line basis down to $ 0. The useful life of the equipment is five years, and it will have a $ 20,000 market value at the end of five years. Operating costs will be reduced by $ 30,000 in the first year and the savings will increase by $5,000 per year in years 2, 3, and 4. Due to increased maintenance costs, savings in year five will be $10,000 less than the year four savings. The equipment will also reduce net working capital by S 5,000 throughout the life of the project. The firm's tax rate is 35 percent, and the required return is 16 percent. What is the NPV of this project?
A company is considering the acquisition of production equipment which will reduce both labor and materials costs. The cost is $ 110, 000 and it will be depreciated on a straight-line basis down to $ 0. The useful life of the equipment is five years, and it will have a $ 20,000 market value at the end of five years. Operating costs will be reduced by $ 30,000 in the first year and the savings will increase by $5,000 per year in years 2, 3, and 4. Due to increased maintenance costs, savings in year five will be $10,000 less than the year four savings. The equipment will also reduce net working capital by S 5,000 throughout the life of the project. The firm's tax rate is 35 percent, and the required return is 16 percent. What is the NPV of this project?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:A company is considering the acquisition of production equipment which will reduce both labor and
materials costs. The cost is $110,000 and it will be depreciated on a straight-line basis down to $
0. The useful life of the equipment is five years, and it will have a $20,000 market value at the end of
five years. Operating costs will be reduced by $ 30,000 in the first year and the savings will increase by
$5,000 per year in years 2, 3, and 4. Due to increased maintenance costs, savings in year five will be
$10,000 less than the year four savings. The equipment will also reduce net working capital by S
5, 000 throughout the life of the project. The firm's tax rate is 3 5 percent, and the required return is 16
percent. What is the NPV of this project?
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