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

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Finance

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.

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