Question
Logan Company is planning to purchase a special machine capable to do certain operations that are now performed manually. This machine will cost $185,000, and
Logan Company is planning to purchase a special machine capable to do certain operations that are now performed manually. This machine will cost $185,000, and it will last for four years. At the end of the fourth-year period, the machine will have residual value of zero. Moreover, use of the machine will reduce labour costs by $88,000 in year 1, $85,000 in year 2, $81,000 in year 3, and $78,000 in year 4. Logan Company requires a minimum return of 22 percent before taxes on all investment project. Required: Should the machine be purchased? Use the net present value method in your calculation. (13 marks) Future Cost Savings PV of Future Cost Savings Year 1 Year 2 Year 3 Year 4 Total NPV Calculation: PV of Future Cost Savings Less: Initial Cost of Investment = Net Present Value (NPV) What is the payback period for this machine? (4 marks) Which method would you prefer and why? (3 marks)
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