Question

K&G Company currently sells 1.05 million units per year of a product to one customer at a price of $3.00 per unit. The customer requires that the product be exclusive and expects no increase in sales during the five-year contract. The company manufactures the product with a machine that it purchased seven years ago at a cost of $723,000. Currently, the machine has a book value of $430,000 but the market value is only $233,000. The machine is expected to last another five years, after which it will have no salvage value. Last year, the production variable costs per unit were as follows:

Direct materials		$2.70
Direct labour		0.80
Variable overhead		0.50
Total variable cost per unit		$4.00

The company president is considering replacing the old machine with a new one that would cost $812,000. The new machine is expected to last five years. At the end of that period, the salvage value will be $340,500. The president expects to save 4% of the company’s total variable costs with the new machine.

Assume that the company’s desired rate of return is 11%. Calculate the net present value of the investment. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)