Question
ACE company is considering adding a new line to its product mix and you are conducting the capital budgeting analysis. the production line would be
ACE company is considering adding a new line to its product mix and you are conducting the capital budgeting analysis. the production line would be set up in unused space in ACE's plant. the product line requires the purchase of a new machine that would cost $325,000. it would cost 35,000 for shipping,10,000 for a new electric set up for the machine,$4,000 for contractor to install the machine and another $5,000 for a new tool not related to the machine. the company also spent $86,220 over the past year on improvements to its assembly line.
the depreciation on the machine is for 4 years utilizing the straight line method. the company's effective tax rate is 40%
the output for the machine is 2540 units a year. each unit is expected to sell at a price of $450 each with a price increase of 3% in year 1,4% in year 2 and 2% thereafter.
you have also been able to uncover the following costs:
direct materials per unit:$55
direct labor per unit:$65
utility costs per unit:$25
the company's wacc is 6%
part1:
what is the npv of this machine purchase? would you purchase the machine? what is the IRR, MIRR and payback period?
part2:
instead of buying the new machine, the company could obtain $35,000 per annum for the space in which the machine will be placed. does this change your answer in part 1?
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