Question
Highland Manufacturing is considering the purchase of an advanced CNC machine. The current machine is operable for two more years and has a zero disposal
Highland Manufacturing is considering the purchase of an advanced CNC machine. The current machine is operable for two more years and has a zero disposal value. If sold now, it could be sold for $40,000. The new machine will cost $250,000, and an additional cash investment in working capital of $50,000 will be required. The new machine will reduce the average amount of time required to produce parts and will decrease labor costs. The investment is expected to net $70,000 in additional cash inflows during the year of acquisition and $120,000 each additional year of use. The new machine has a three-year life and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.
- What is the net present value of the investment, assuming the required rate of return is 8%?
- Would the company want to purchase the new machine?
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