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NPV for new production or lease option

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.

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Solution Summary

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