Reference no: EM131894678
XYZ Ltd. provides you the following information :
1.Purchase Price of New Machinery$1,000,000
2.Installation Expenses $150,000
3.Workers' Training Expenses incurred to put the asset to use $ 50,000
4.Subsidy from Govt. 60% of Purchase price
5.Working Capital $ 300,000
6.Useful Life of the machine 5 years
7.Book Salvage Value 10 % of purchase price
8.Cash Salvage Value $ 120,000
9.Method of Depreciation Straight line
10.Tax Rate 30%
11.Cost of Capital 10%
12.Sales Units: 1st yr 100,000 units, 2nd yr 200,000 units, 3rd yr 300,000 units, 4th yr 400,000 units, 5th yr 500,000 units.
13.Initial selling price per unit of $ 10 will continue for first 2 years and $ 9 thereafter. Variable cost is 40% of initial selling price. Annual fixed cost other than depreciation is $ 200,000 which will increase to $ 3,00,000 after 3rd year.
Required: Advise the company whether the machinery should be purchased or not on the basis of the Net Present Value