Foster Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of trenching machines (to replace an existing manual system).
The outlay required is $3,500,000.
The NC equipment will last 5 years with no expected salvage value.
The expected incremental after-tax cash flows (cash flows of the NC equipment minus cash flows of the old equipment) associated with the project follow:
| Year |
Cash Benefits |
Cash Expenses |
| 1 |
$3,900,000 |
$3,000,000 |
| 2 |
3,900,000 |
3,000,000 |
| 3 |
3,900,000 |
3,000,000 |
| 4 |
3,900,000 |
3,000,000 |
| 5 |
3,900,000 |
3,000,000 |
Foster has a cost of capital equal to 10%. The above cash flows are expressed without any consideration of inflation.