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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?

Solution Preview

a. The net present value is the sum of present value of the savings less the initial investment. The total time period is 8 years and the rate is 10%. Since the savings are an annuity, we can use the ...

Solution Summary

The solution explains how to calculate the NPV of a capital project.