Question
Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at
Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $480,000 cost with an expected four-year life and a $20,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
Expected annual sales of new product | $ | 1,840,000 | |
Expected annual costs of new product | |||
Direct materials | 480,000 | ||
Direct labor | 672,000 | ||
Overhead (excluding straight-line depreciation on new machine) | 336,000 | ||
Selling and administrative expenses | 160,000 | ||
Income taxes |
5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the assets life.)
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