Topic 5 (20 points)

The CEO of Midwest Manufacturing Company has asked for your analysis of and recommendation related to the proposed acquisition of an additional stamping machine for its principal manufacturing plant. Demand for the companys products has risen to a level that exceeds its present productive capacity. An additional stamping machine will make it possible for the company to increase its production and sales by 15 percent, resulting in projected incremental relevant cash flows (after income taxes and the tax benefits of the depreciation tax shield) in each of the next five years, as indicated at right:	Year	Projected incremental cash flows
	1	$40,000
	2	30,000
	3	40,000
	4	50,000
	5	20,000
	Total	$180,000

The equipment will cost $150,000 to purchase and install. Management estimates that its economic life will be five years, after which it will have no residual value. The companys required rate of return on new investments (cost of capital) is 14.0 percent (or, 0.14).

Complete the NPV analysis of the stamping machine proposal, below. Regard all incremental relevant cash flows as risky and assume they occur at the end of years indicated, as listed above.

State your recommendation to the CEO, including the basis for it. Limit the length of your response to 50 words.

Complete the NPV analysis of the stamping machine proposal:
Year (n)	Relevant cash flow	Discount factor	Discounted cash flows
Time zero
1
2
3
4
5
State your recommendation to the CEO, including the basis for it. Limit the length of your response to 50 words.
Replace this text with your response