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Ignoring taxes and depreciation expenses calculate the net present value of the proposed investment below. Discuss your results. Johnston Aggregates Ltd. sells 24,000 bags of

Ignoring taxes and depreciation expenses calculate the net present value of the proposed investment below. Discuss your results.

Johnston Aggregates Ltd. sells 24,000 bags of a certain product for $96 per bag. This product is produced using a machine which was purchased five years ago at a cost of $625,000. It presently has a book value of $375,000 and a salvage value of $47,000. The machine is expected to last another five years after which it will have no salvage value.

Currently the costs per bag are as follows:

Direct materials, 5 kg @ $1.62/kg

Direct labour 4.25 hrs @ $15.80/hr

Variable overhead 4 hrs @ $1.34/hr

Fixed overhead, based on an annual activity level of 100,000 direct labour hours 4hrs @ $1.65/hr

In 2022 the Company expects the following cost escalations:

The selling price will increase by 9.75%

Direct labour rates will increase by 8.37%

Sales are expected to increase to 27,800 bags per year and remain at that level.

Management is presently considering the replacement of their old machine with a new one which would cost $825,000 and ready to be used on January 1, 2022. The new machine is expected to last five years with a salvage value of $42,000. By using the new machine, it is expected to cut the variable direct labour hours to 3.5 hours per bag. However, additional annual labour costs of $56,000 will be required. The Company has a minimum desired rate of return on investments of 10%.

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