A company plans to purchase a new machine due to the expected demand for a new product. The machine costs Ghc185,000 and it is expected that the machine shall be used for five (5) years with a scrap value of Ghc15,000. The company expects the demand for the product to be as follows: Year 1 2 3 4 5 Demand (Units) 25,000 30,000 35,000 40,000 20,000 Increase Selling Price 2% per year Variable Cost of production Fixed production expenses 3% per year 5% per year The company’s cost of capital is 10% and pays corporate tax at a rate of 25% in the related year. Calculate the Net Present Value (NPV) of purchasing the new machine advice whether it makes economic sense to buy the new machine.
A company plans to purchase a new machine due to the expected demand for a new product. The machine costs Ghc185,000 and it is expected that the machine shall be used for five (5) years with a scrap value of Ghc15,000. The company expects the demand for the product to be as follows: Year 1 2 3 4 5 Demand (Units) 25,000 30,000 35,000 40,000 20,000 Increase Selling Price 2% per year Variable Cost of production Fixed production expenses 3% per year 5% per year The company’s cost of capital is 10% and pays corporate tax at a rate of 25% in the related year. Calculate the Net Present Value (NPV) of purchasing the new machine advice whether it makes economic sense to buy the new machine.
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
Problem 1PS
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Question
A company plans to purchase a new machine due to the expected demand for a
new product. The machine costs Ghc185,000 and it is expected that the machine
shall be used for five (5) years with a scrap value of Ghc15,000. The company
expects the demand for the product to be as follows:
|
Year |
1 |
2 |
3 |
4 |
5 |
|
Demand (Units) |
25,000 |
30,000 |
35,000 |
40,000 |
20,000 |
|
Increase Selling Price |
2% per year |
|
Variable Cost of production |
3% per year |
The company’s cost of capital is 10% and pays corporate tax at a rate of 25% in
the related year. Calculate the
machine advice whether it makes economic sense to buy the new machine.
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