Capital Budgeting Project Problem
ABC is evaluating a proposal to purchase a new machine that would cost $150,000 and have a salvage value of $20,000 in 5 years. It would provide annual operating cash savings of $25,000, as follows:
|
Old Machine
|
New Machine
|
|
Salaries
|
$40,000
|
$20,000
|
|
Supplies
|
7,000
|
6,000
|
|
Maintenance
|
9,000
|
5,000
|
|
Total
|
$56,000
|
$31,000
|
If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine is not purchased, the old machine will be disposed of in 5 years at a predicted salvage value of $5,000. The old machine's present book value is $60,000. If kept, in 1 year the old machine will require repairs predicted to cost $30,000.
Dale Davis's cost of capital is 8%.
Required: Compute the NPV. Should the new machine be purchased? Why or why not?