Question
You are consulting for a skateboard company that is trying to make a decision regarding whether to invest in a new skateboard assembly machine that
- You are consulting for a skateboard company that is trying to make a decision regarding whether to invest in a new skateboard assembly machine that just came out on the market. The machine would cost the company $1.3 M. Research estimates indicate that the machine would increase productivity and enable the company to increase output by 10,000 skateboards each year over the life of the machine. The machine's life is estimated at 3 years. (After those 3 years, the machine would have no value.)
a)Suppose the market price for the company's skateboards is $100 and market research suggests this price will remain constant over the next 3 years, even with the increased output that would result from the machine. The variable costs of production are constant at $50 per board (this is true with or without the machine). Report the total relevant cash flows for each year that the company should consider when deciding whether to invest.
b)Suppose the interest rate on business loans is 10%. Using the net present value method, evaluate the investment opportunity. (Assume all cash flows occur at the end of each production year.) Make a recommendation to the company about whether they should invest or not, backing up your recommendation using your NPV analysis.
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