Question
Better Plastics' management has recently been looking at a proposal to purchase a new plastic-injection-style molding machine. With the new machine, the company would not
Better Plastics' management has recently been looking at a proposal to purchase a new plastic-injection-style molding machine. With the new machine, the company would not have to buy small plastic parts to use in production. The estimated useful life of the machine is 15 years, and the purchase price, including all setup charges, is $400,000. The residual value is estimated to be $40,000. The net addition to the company's cash inflow as a result of the savings from making the parts is estimated to be $70,000 a year. Better Plastics' management has decided on a minimum rate of return of 14 percent. Use Table 1 and Table 2. 1. Using the net present value method to evaluate this capital investment, determine whether the company should purchase the machine. To support your answer, complete the chart below. Use the minus sign to enter a negative net present value. Better Plastics' Computation of NPV Year Net Cash Inflows 14% Factor Present Value 115 $ $ Residual value Total present value of cash inflows $ Purchase price of machine Net present value $ Show All Feedback 2. If management had decided on a minimum rate of return of 16 percent, should the machine be purchased? To support your answer, complete the chart below. Use the minus sign to enter a negative net present value. Better Plastics' Computation of NPV Year Net Cash Inflows 16% Factor Present Value 115 $ $ Residual value Total present value of cash inflows $ Purchase price of machine Net present value $
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