Explore BrainMass

Explore BrainMass

    NPV for new production or lease option

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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 March 4, 2021, 9:57 pm ad1c9bdddf

    Solution Summary

    The solution explains the calculation of NPV for new production or lease option