Should the Firm Purchase the New Machine?
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Levelhead Company is considering the purchase of a new machine which will cost $1,000,000 (including installation and freight costs). The machine has an estimated useful life of five years, after which it can be sold for $350,000. If the new machine is purchased, the company estimates that the after-tax cash inflows will be as follows:
Years 1 - 3 $300,000
Years 4 - 5 $250,000
The after-tax cash outflows are expected to be $60,000 each year.
The company has a discount rate of 9 percent. Assuming Levelhead Company is not integrated with the dividend imputation system, should the firm purchase the new machine?
Year Year Year Year Year Year
0 1 2 3 4 5 Required Rate Of Return 9.00%
Purchase Price ($1,000,000)
Inflow $300,000 $300,000 $300,000 $250,000 $250,000
OutFlow ($60,000) ($60,000) ($60,000) ($60,000) ($60,000)
Sale Price $350,000
Net Cash Flow ($1,000,000) $240,000 $240,000 $240,000 $190,000 $540,000
1.09 1.1881 1.295029 1.41158161 1.538623955
PV Cash Flow ($1,000,000) $220,183 $202,003 $185,324 $134,601 $350,963
NPV 93,074
The company should purchase the automated machine as the NPV > 0.
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Solution Summary
The solution discusses if the firm should purchase the new machine.
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