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Should you buy the new machine? NPV method.

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The new machine will be depreciated using the straightline method over its useful life. The new machine will replace an existing machine that was bought 10 years ago for $600,000. It had an estimated useful life of 15 years and is being depreciated using the straightline method over its life. The machine could be sold for $150,000 today.

If the new machine was implemented, the company estimates that revenues will increase by the following amounts each year:

Years 1 - 3 $300,000
Years 4 - 5 $250,000

Cash costs are also expected to increase by an additional $60,000 each year.

The company has an after-tax discount rate of 9 percent and is subject to the company tax rate of 30 percent. Assuming Levelhead Company is not integrated with the dividend imputation system, should the firm purchase the new machine?

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Solution Summary

I presumed a five year life and evaluated the purchase using net present value techniques.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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