Problem: Capital Budgets:
Rambus Inc. would like to purchase a production machine for $325,000. The machine is expected to have a life of three years, and a salvage value of $50,000. Annual maintenance costs will total $12,500. Annual savings are predicted to be $112,500. The company's required rate of return is 12%.
Factors: Present Value of $1 (r = 12%)
Year 0 1.0000
Year 1 0.8929
Year 2 0.7972
Year 3 0.7118
Questions:
(1) Using the Present Value Factors for $1, calculate the net present value of this investment (ignoring taxes).
(2) Based on your answer in requirement 1, should Rambus purchase the production machine?