OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $4million,

Question:

OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $4million, has a 20-year life, and will have zero salvage value. If the system is implemented, the company will save $500,000per year in direct labor costs. The company requires a 10% return from its investments.

1. Compute the proposed investment’s net present value.

2. Using your answer from part 1, is the investment’s internal rate of return higher or lower than 10%?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...

Fantastic news! We've Found the answer you've been seeking!