Question
Dolphin Plastics is considering replacing molding equipment used to make party cups. The current equipment was purchased two years ago for $95,000. At the time
Dolphin Plastics is considering replacing molding equipment used to make party cups. The current equipment was purchased two years ago for $95,000. At the time of purchase it had a 7-year life with an expected salvage value of $10,000. If sold today Dolphin expects to receive $55,000 for the machine. Dolphin depreciates all assets using straight-line depreciation. Dolphin currently has revenue of $700,000 that is expected to grow at 5% per annum. Dolphin currently has a gross profit margin of 17%.New machinery today will cost $145,000. The new machinery is expected to last 5 years and has a salvage value of $15,000. The new machinery will lower annual operating costs by $5,000 per annum. In addition, the new machine is expected to increase expected revenue (shown below) and increase the firm's gross profit margin to 19%.
Year 1 120,000
Year 2 130,000
Year 3. 140,000
Year. 4 125,000
Year. 5 125,000
Assume a tax rate of 25% and a cost of capital of 11%. What is the project's NPV.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To calculate the NPV we will first calculate the annual cash flows for each year based on th...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started