Beta Company is considering the purchase of a new equipment to automate part of their manufacturing process. The old system can be sold for $55,000. The new system will cost $4,500,000 and will last for 10 years. The new equipment will have a salvage value of 45,000 at the end of its useful life. The company's cost of capital is 14%. A working capital of $100,000 is necessary in the first year and another $150,000 is needed at the end of year 7 to run the new equipment. The investment in working capital will be recovered at the end of the useful life. The new equipment will increase production and sales by 15% annually. Unit selling price and variable cost per unit will remain unchanged.

Selling price per unit

$25

Variable cost per unit

$18

Units produced and sold (before investment in new equipment)

250,000

The annual cash savings associated with the system are as follows:

Decreased waste

$150,000

Increased quality

200,000

Decrease in operating costs

125,000

Increase in on-time deliveries

25,000

Required:

a.Calculate the NPV for the new equipment.

b.Should the company invest in this new equipment based on the NPV analysis? Explain.

c.Calculate the payback period for the new equipment.