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XYZ Co. is interested in purchasing a state-of-the-art widget machine for its manufacturing plant. The new machine has been designed to basically eliminate all errors
XYZ Co. is interested in purchasing a state-of-the-art widget machine for its manufacturing plant. The new machine has been designed to basically eliminate all errors and defects in the widget-making production process. The new machine will cost $150,000 and have a salvage value of $70,000 at the end of its seven-year useful life. XYZ has determined that cash inflows for years 1 through 7 will be as follows: $32,000; $57,000; $15,000; $28,000; $16,000; $10,000, and $15,000, respectively. Maintenance will be required in years 3 and 6 at $10,000 and $7,000 respectively. XYZ uses a discount rate of 11 percent and wants projects to have a payback period of no longer than five years. The following information is calculated by XYZ Co.: Year Cash flow 1 $150,000 1 32,000 2 57,000 3 5,000 4 28,000 5 16,000 6 3,000 7 15,000 7 70,000 Net present value Discount factor 1 1.0000 .9009 .8116 .7312 .6587 5935 .5346 .4817 .4817 Present value S(150,000.00 ) 28,828.80 46,261.20 3,656.00 18,443.60 9,496.00 1,603.80 7,225.50 33,719.00 $_(766.10 ) a- Compute the firm's profitability index. b- Evaluate this investment proposal for XYZ Co., considering the quantitative and qualitative factors
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