Question
The COO of AppleLike Inc. is considering an investment in a new machine for iPadLike production. The machine costs $420,000. The COO expects to make
The COO of AppleLike Inc. is considering an investment in a new machine for iPadLike production. The machine costs $420,000. The COO expects to make iPadLikes on this machine for 6 years, and then he will no longer use the machine. Revenues are expected to be $100,000 each year for this machine. The machine is also expected to decrease production costs of the company by $35,000 per year. There is no net change in working capital due to the new machine. The market value of the machine in 6 years is expected to be $15,000. The company will depreciate the machine using straight-line depreciation, the corporate tax rate is 20%, and the required rate of return demanded by the company on any capital expenditure is 18%. Should the company buy the machine? Provide the NPV to justify your choice.
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