ACME manufacturing is considering replacing an existingproduction line with a new
line that has a greater output capacity and operates with lesslabour than the existing
line. The new line would cost $1 million, have a 5-year life,and would be depreciated
using 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, it would require fewer operators, resulting in asaving of $40 000 per year
before tax and unadjusted for inflation (in today’s dollars).Additional sales with the new
machine are expected to result in additional net cash inflows,before tax, of $60 000 per
year (in today’s dollars). If ACME invests in the new line, aone-time investment of $10
000 in additional working capital will be required. The tax rateis 30 per cent, the
opportunity cost of capital is 10 per cent, and the annual rateof inflation is 3 per cent.
What is the NPV of the new production line?
Note: show workings how to calculate the revenue, op exp, and PVof net cash flows.
