Net Present Value

Starliper Industries has developed a project to produce a new product: Widgets. To develop the widgets, Starliper Industries needs to purchase a new machine that will help develop the widgets. Starliper Industries is deciding between two different machines, New Tech and Standard Classic that have the capabilities necessary to develop the widgets. Your job will be to compare the two different machines using net present value. The company has produced the following information regarding the widgets and the two machines:

• The cost to purchase New Tech will be $421,000 and will have a useful life of 6 years; New Tech will have a salvage value of $26,000 at the end of 6 years. Annual straight-line depreciation is $65,833.[1] The cost to purchase Standard Classic will be $235,000 and will also have a useful life of 6 years; Standard Classic will have a salvage value of $5,000 at the end of 6 years. Annual straight-line depreciation is $38,333.[2]
• Total Contribution Margin from the sale of Widgets will be different for each machine because the Standard Classic machine requires more variable manufacturing overhead costs. The expected contribution margin if the New Tech machine is chosen is the following:

Year	Total Contribution Margin
1	$300,000
2	$300,000
3	$360,000
4-6	$440,000

The contribution margin if the Standard Classic is chosen is expected to be the following:

Year	Total Contribution Margin
1	$255,000
2	$280,000
3	$355,000
4-6	$438,000

• Working Capital of $95,000 will be required at the beginning of the production of Widgets for the New Tech machine, and working capital of $53,000 will be required at the beginning of the production of Widgets for the Standard Classic machine. For both machines the working capital will be released at the end of the project (i.e., end of year 6).
• The yearly cost of machine maintenance will be $50,000 for the New Tech and will be $72,000 for the Standard Classic machine.
• Other fixed costs for salaries, and insurance, which will be the same regardless of the machine chosen, will be the following:

Year	Total Other Fixed Costs
1-2	$180,000
3	$150,000
4-6	$120,000

• The Standard Classic machine will require a major overhaul that will cost $100,000 at the end of year 3 of the project. This will not apply to the New Tech machine. This overhaul is treated as an operating expense on the income statement.
• The Required Rate of Return for Starliper Industries is 11%.
• Starliper Industries tax rate is 22%
• Use the Total-Cost Approach, which is that all cash flows should be included in the evaluation of net present value, not just the cash flows that are different between the two choices.

Required:

• Use the NPV Project Template Excel file on Blackboard in the Project 2 folder on Blackboard.
• The cells you are required to fill are the cells in the Net Present Value Analysis box in both the New Tech and Standard Classic tabs.
  • The Net Present Value cell must be filled
  • The Project Profitability Index cell must be filled
  • The cells outside of the Net Present Value Analysis box are for your convenience but will not be graded.
• You must use special Excel formulas to calculate Net Present Value
  • You may use the Present Value (pv) formula method to find the present value of the cash flows of each individual year (use cell row Discounted CF (Optional) for this method)
  • Alternatively, you may use the Net Present Value (NPV) formula method.
  • You do not have to utilize both methods (although it may provide a nice check). You will not receive bonus points for doing both methods
• GRADED: Submit your Excel template to the Blackboard assignment Project 2 Submission in the Project 2 folder on Blackboard.
  • Do not alter the structure of the template
  • *In the Comments section on the submission page, state which machine you believe Starliper Industries should purchase and a short explanation backing that decision.*

Rubric:

• Correct Net Present Values for the two machines: 30
• Correct use of a special excel formula: 15
• Well-reasoned response regarding choice of machine: 10
• Correct values in Net Present Value Analysis box in template: 20 total points

Due Date: Wednesday, October 9th at 11:59pm.

[1] Straight-line depreciation: (421,000-26,000)/6

[2] Straight-line depreciation: (235,000-5000)/6