Calculating the NPV of New Equipment
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Photographic laboratories recover and recycle the silver used in photographic film. Stikine River photo is considering purchase of improved equipment for their laboratory at Telegraph Creek. Here is the information they have:
- The equipment costs $100,000 and will cost $80,000 per year to run.
- It has an economic life of 10 years but can be depreciated over 5 years by the straight-line method.
- It will recover an additional 5000 ounces of silver per year.
- Silver is selling for $20 per ounce. Over the past 10 years, the price of sliver has appreciated by 4.5% per year in real terms. Silver is traded in an active competitive market.
- Stikine's marginal tax rate is 35%. Assume U.S. tax law.
- Stikine's company cost of capital is 8% in real terms.
- The nominal interest rate is 6%.
What is the NPV of the new equipment? Make additional assumptions as necessary. Justify your answer.
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This solution provides calculations in NPV for new equipment.
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