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Pooh Industries is contemplating purchasing a new machine that will significantly improve the efficiency of their...

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Finance

Pooh Industries is contemplating purchasing a new machine thatwill significantly improve the efficiency of their operations. Todate the company has spent $15,000 evaluating the machine to betterdetermine annual operating savings from using the machine.

The new machine would cost $800,000 and would be depreciatedover an expected life of 8 years to a $40,000 salvage value usingthe straight-line method. Pooh forecasts that the new machine wouldreduce operating expenses by $200,000 per year. The firm's marginaltax rate is 40% and its WACC (which is the appropriate rate to usefor evaluating this machine) is 15%. Pooh estimates that the newmachine could be sold at the end of its life (i.e., in 8 years) forsalvage value (i.e., $40,000).

The new machine would require additional net working capital of$90,000 which will be recovered at the end of the project. Thecompany will hire a new mechanic for maintenance of the machine aswell as for other duties related to this project. This new employeewill cost the company $75,000 per year (this amount is not includedin the operating cost change listed above).

What is this project’s NPV?

Answer & Explanation Solved by verified expert
3.8 Ratings (695 Votes)
Please refer to below spreadsheet for calculation and    See Answer
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