Net present value & rate of return
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You own an aluminum extrusion company. Your plant manager has recommended a new extrusion machine be bought for $250,000. He says it will save $65,000 per year in reduced labor costs and reduced aluminum waste. The machine will have a life of 8 years with no salvage value. Your required rate of return is 10%.
a. Please calculate the net present value of this investment. Should you make the investment?
b. Would you make the same decision if your required rate of return was 16 percent? Why or why not?
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The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business ...
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