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KAG Company currently sells 1,05 million units per year of product to one customer at a price of $3.50 per unit. The customer requires that
KAG Company currently sells 1,05 million units per year of product to one customer at a price of $3.50 per unit. The customer requires that the product be exclusive and expects no Increase in sales during the five year contract. The company manufactures the product with a machine that it purchased seven years ago at a cost of 5701,000. Currently, the machine has a book value of $450,000 but the market value is only $250,000. The machine is expected to last another five years, after which it will have no salvage value Last year, the production variable costs per unit were as follows: Direct materials $2.50 Direct labour 0.70 Variable overhead 0.30 Total variable cost per unit $3.50 The company president is considering replacing the old machine with a new one that would cost $814,500. The new machine is expected to last five years. At the end of that period, the salvage value will be $333,506. The president expects to save 4% of the company's total variable costs with the new machine Assume that the company's desired rate of return is 12% Calculate the net present value of the investment (or the net present value is negative, use either a negative son preceding the number 045 or parentheses es (45), for calculation purposes, use S decimal places as displayed in the factor table provided : 1.25124 and Final answer to decimal places... 5.275.) Net present value Using the net present value method, should the company replace the old machine with the new one? The president replace the equipment based on net present value DIN TOTT
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