Can you tell me how to calculate NPV for a question like this. ou are the financial executive of Coffee Manufacturing Company (CMC), the manufacturing division has been evaluating various new coffee grinding machines to replace its fully depreciated old grinder. The new coffee grinder is to be used in production in an effort to improve the production process and reduce maintenance costs. To date they have spent $126,000 evaluating five different grinding machines and have now settled on a German Grinding Machine GGM as it will improve efficiency of the production process and reduce raw material requirements. In addition, GGM produces a by-product that can be sold instead of rubbish. The new GGM machine will cost $150,000. CMC is considering using a bank loan to finance the new machine purchase at an interest rate of 8.75% p.a. with payments of $31,500 per year. The old existing machine has been fully depreciated for tax purposes but can be sold today for $25,000. Due to the complexity of the GGM machine it will last 5 years before requiring replacement. The old machine was very compact and occupied a small amount of CMC's factory space. CMC has been renting its spare factory space to a third party for $35,000 per year. Due to the by-products generated by the new machine and the bigger size of GGM, CMC will have to cancel the existing lease with the external tenant and take over the space. This will require a once-off compensation payment to the tenant of $21,000. The GGM machine will have a limited salvage value at the end of the five-year life. CMC estimates the salvage value of $67,000 for this machine at the end of 5 years. The GGM machine will have to be serviced by GGM specialists. The service contract will cost $54,000 annually, which is less than the current $74,000 maintenance cost spent on the old one. The main reason to buy the GGM machine is because it is more efficient and productive to run. CMC will be able to increase sales by $130,000 per year and, due to efficiency gains while COGS are expected to decrease by $39,000 per year. The by- product will be sold for $9,000 per year and is in addition to sale improvement. No additional costs will be incurred in generating sales of the by-product. The more efficient output of the machine will enable CMC to reduce its holdings of raw materials by $66,000 at the beginning of the first year. CMC conducts all its capital evaluations in constant dollars and has a management deprecation policy that requires depreciating all long-term assets over a ten- year life straight-line. The management of CMC is concerned about the consulting costs of $126,000 already paid to consultants and have suggested that this cost should be spread over the 5 years of the projects

life. CMC's tax rate is 30% and they use a nominal required rate of 14%pa. They expect inflation over the five-year period to be 3%pa.