Question
Ping Pong Company is planning to purchase a machine capable to do certain operations that are now performed manually. This machine will cost $50,000, and
Ping Pong Company is planning to purchase a machine capable to do certain operations that are now performed manually. This machine will cost $50,000, and it will last for five years. At the end of the five-year period, the machine will have a zero-scrap value. Moreover, use of the machine will reduce labour costs by $18,000 per year. Ping Pong Company requires a minimum return of 20 percent before taxes on all investment project.
Required:
- Should the machine be purchased? Use the net present value method in your calculation.
- What is the payback period for this machine?
- Which method would you prefer and why?
1.
|
| Future Cost Savings | PV of Future Cost Savings PV = FV / (1+i)t |
| Year 1 | $18,000 |
|
| Year 2 | $18,000 |
|
| Year 3 | $18,000 |
|
| Year 4 | $18,000 |
|
| Year 5 | $18,000 |
|
| Total |
|
|
NPV Calculation:
| PV of Future Cost Savings |
|
| Less: Initial Cost of Investment |
|
| = Net Present Value (NPV) |
|
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Smith and Roberson Business Law
Authors: Richard A. Mann, Barry S. Roberts
15th Edition
1285141903, 1285141903, 9781285141909, 978-0538473637
