Question
Burnaby Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would cost $1,850,000. Installation and testing costs would be $35,000
Burnaby Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would cost $1,850,000. Installation and testing costs would be $35,000 and $25,000 respectively. Once operational, the equipment will cause an increase in working capital of $120,000. The new equipment is expected to generate increased annual sales of $720,000. Variable costs to operate the machine are estimated at 42% of sales and annual fixed costs would be lowered by $75,000. The equipmenthasanestimate6yearlifeandasalvagevalueof$90,000. Thecompanyrequiresan11% return on its investments. Ignore income taxes. Required:
a. Compute the net present value.
b. How do you compare NPV to Payback method? Which method is likely to be more reliable?
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