<p>Creighton Industries is considering the purchase of a new strapping machine,

Question

<p>Creighton Industries is considering the purchase of a new strapping machine, which will cost $150,000, plus an additional $10,500 to ship and install. The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method. The machine is expected to generate new sales of $45,000 per year and is expected to save $16,000 in labor and electrical expenses over the next 5-years. The machine is expected to have a salvage value of $20,000. Creighton's income tax rate is 35%. Creighton uses a 12.5% discount rate for capital budgeting purpose. What is the machine's NPV?</p>
<p>a) $29,888</p>
<p>b) $27,894</p>
<p>c) $22,153</p>
<p>d) $25.062</p>
<p>&#160;</p>
<p>show your work</p>

Explanation / Answer

Determine cash flow for each year Year 0 = -150,000 - 10,500 = -160,500 Year 1 to 4 = (+45,000 + 16,000)*0.65 + (32,100*0.35) = 50,885 Year 5 = (+45,000 + 16,000)*0.65 + (32,100*0.35) + (20,000*0.65)=63,885 using financial calculator, we get NPV of 27,894

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