The management of Urbine Corporation is considering the purchase of a machine that would cost...
Question:
The management of Urbine Corporation is considering the purchase of a machine that would cost $300,000 would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $60,000 per year. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes in this problem.) The factor for the present value of an ordinary annuity of $1 where n = 6 years and i = 12% is 4.11141.
Should the company make the purchase of the machine based on their required rate of return?
Evaluate Potential Machine Purchase Using Net Present Value Analysis
So, this question is a situation where we should use net present value analysis to determine if the Company should consider making the purchase of this machine. Using the labor and other cost savings which have been identified annually, first, we should present value these savings for the 6-year life of the new machine using the company's required minimum pretax return of 12% on any project. The result of this calculation should then be compared to the amount of the cost of machine to determine if the net present value is positive or negative.
Answer and Explanation: 1
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View this answerShould the company make the purchase of the machine based on their required rate of return?
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How to Calculate Net Present Value: Definition, Formula & Analysis
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