8. Proust Manufacturing Co. produces personal fitness machines sold through infomercials. The once successful line is no longer selling well, so the company is considering production of a new improved cardio-vascular machine. The project's expected after tax cash flow is given below. The after tax cash flow at time zero, $-700,000, is the cost of equipment. As an alternative, rather than purchase the equipment, Proust can instead lease it for four equal annual payments of $185,000 paid at the beginning of each year. The required rate of return (hurdle rate) for this business is 11 percent.
Time After Tax
Cash Flow (net)
Year 0 -700,000
Year 1 375,000
Year 2 250,000
Year 3 140,000
Year 4 75,000
Calculate the net present value of both the new production option and of the lease option. Determine the best option for Proust and justify your answer.© BrainMass Inc. brainmass.com October 25, 2018, 2:06 am ad1c9bdddf
The solution explains the calculation of NPV for new production or lease option
NPV and IRR for business decision
See attached file.
A local businessman decides to purchase a specialized piece of production equipment at a capital cost of $403,000. The businessman manufactures cardboard boxes, and a particular machine is essential in the production process. The firm will save annual machine leasing costs of $104,000 per year. The machine has an asset life of 6 years. The cost of capital of the bank loan required to fund the project is 11%. You have been hired as a consultant to assist the firm in determining whether to purchase this equipment. Using both NVP and IRR calculations, advise the local businessman whether the machine should be purchased or not.View Full Posting Details