ACME manufacturing is considering replacing an existing production line with a new line that has a...

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ACME manufacturing is considering replacing an existingproduction line with a new line that has a greater output capacityand operates with less labour than the existing line. The new linewould cost $1 million, have a 5-year life, and would be depreciatedusing the straight-line depreciation method over 5 years. At theend of 5 years, the new line could be sold as scrap for $200 000(in year 5 dollars). Because the new line is more automated, itwould require fewer operators, resulting in a saving of $40 000 peryear before tax and unadjusted for inflation (in today’s dollars).Additional sales with the new machine are expected to result inadditional net cash inflows, before tax, of $60 000 per year (intoday’s dollars). If ACME invests in the new line, a one-timeinvestment of $10 000 in additional working capital will berequired. The tax rate is 30 per cent, the opportunity cost ofcapital is 10 per cent, and the annual rate of inflation is 3 percent. What is the NPV of the new production line?

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ACME manufacturing is considering replacing an existingproduction line with a new line that has a greater output capacityand operates with less labour than the existing line. The new linewould cost $1 million, have a 5-year life, and would be depreciatedusing the straight-line depreciation method over 5 years. At theend of 5 years, the new line could be sold as scrap for $200 000(in year 5 dollars). Because the new line is more automated, itwould require fewer operators, resulting in a saving of $40 000 peryear before tax and unadjusted for inflation (in today’s dollars).Additional sales with the new machine are expected to result inadditional net cash inflows, before tax, of $60 000 per year (intoday’s dollars). If ACME invests in the new line, a one-timeinvestment of $10 000 in additional working capital will berequired. The tax rate is 30 per cent, the opportunity cost ofcapital is 10 per cent, and the annual rate of inflation is 3 percent. What is the NPV of the new production line?