Dickinson Brothers is considering investing in a machine to produce computer keyboards. The price of the machine
Question:
Dickinson Brothers is considering investing in a machine to produce computer keyboards. The price of the machine will be £400,000, and its economic life is 5 years. The machine will be depreciated by the reducing balance (20 per cent) method but will be worthless in 5 years. The machine will produce 10,000 keyboards each year. The price of each keyboard will be £40 in the first year and will increase by 5 per cent per year.
The production cost per keyboard will be £20 in the first year and will increase by 10 per cent per year. The project will have an annual fixed cost of £50,000 and require an immediate investment of £25,000 in net working capital. The corporate tax rate for the company is 28 per cent. If the appropriate discount rate is 15 per cent, what is the NPV of the investment?
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe