Question
Stephen Spinelli, Inc. is considering investment in a machine to produce computer keyboards. The price of the machine is $400,000 and its economic life is
Stephen Spinelli, Inc. is considering investment in a machine to produce computer keyboards. The price of the machine is $400,000 and its economic life is five years. The machine will be depreciated to a value of zero over the five-year period. The machine will produce 10,000 units of keyboards each year. The price of the keyboards is $40 in the first year. It will increase at 5 percent per year. The production cost per unit of the keyboard is $20 in the first year, and it will increase at 10 percent per year. Corporate tax rate is 34%. The discount rate is 15 percent. Working capital requirements: Change in NWC over the previous year Year 0 $10,000 +$10,000 Year 1 20,000 +$10,000 Year 2 30,000 +$10,000 Year 3 40,000 +$10,000 Year 4 30,000 -$10,000 Year 5 30,000 Estimate the total cash flows and find out the NPV, IRR, and PI of this project.
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