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Question 2 (20 marks) - Capital Budgeting Zoomba Ltd. is considering the acquisition of new production machine. If purchased, the new machine would cost
Question 2 (20 marks) - Capital Budgeting Zoomba Ltd. is considering the acquisition of new production machine. If purchased, the new machine would cost $850,000. Installation and testing costs would be $4,000 and $3,000 respectively. Once operational, the machine will cause an increase in working capital of $30,000. The new machine is expected to generate increased annual sales of $550,000. Variable costs to operate the machine are estimated at 45% of sales and annual fixed costs would be lowered by $60,000. The machine has an estimate 5-year life and a salvage value of $70,000. The company requires an 12% return on its investments. Ignore income taxes. Required: a. b. Compute the net present value (NPV). Determine the payback period of the investment. c. How can the above information be used in the decision making process for the new production machine? I
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