About production costs associated with the new machine

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Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. There is, however, some uncertainty about production costs associated with the new machine. The production department has estimated operating costs at 70% of revenues, but senior management realizes that this figure could turn out to be as low as 65% or as high as 75%. The new machine will be depreciated at a rate of $200,000 per year (straight line, zero salvage). Keener's cost of capital is 13%, and its marginal tax rate is 40%. Assume that Keener Clothiers assigns the following probabilities to production cost as a percent of revenue.

% of Revenue Probability

65% .30

70% .50

75% .20

Compute its expected NPV. Round the answer to two decimal places. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2.

$

Reference no: EM131350549

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