A large food-processing corporation is considering using new technology to speed

Question

A large food-processing corporation is considering using new technology to speed up and eliminate waste in the potato-peeling process. The system will save the company $1,224,000 per year in labor and materials. However it will require an additional operating and maintenance (O&M) cost of $268,000. Annual income taxes will also increase by $300,000. The system is expected to have a 12 years service life and will have a salvage value of $239,000. If the company's MARR is 16.2%, what is the maximum amount that should be spent on purchasing the new technology?"

Explanation / Answer

Savings= 1224000

Less: operating cost 268000

Less: tax expense 300000

CFAT= 656000

Terminal cash flows= $239000

PV of cash flows are given by:

CF1= 656000 F1= 11 ,CF2= 656000+239000= 895000, I= 16.2% CPT NPV

PV of cash flows= $ 3420608.01

This is the maximum investment that company should spend on purchasing the new technology so that NPV =0

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