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A company is evaluating the feasibility of investing in machinery to manufacture an automotive component. It...

A company is evaluating the feasibility of investing in machinery to manufacture an automotive component. It would need to make an investment of $530,000 today, after which, it would have to spend $6,500 every year starting one year from now, for eight years. At the end of the period, the machine would have a salvage value of $8,000. The company confirmed that it can produce and sell 8,700 components every year for eight years and the net return would be $13.60 per component. The company’s required rate of return is 6.00%.
a. What is the Net Present Value(NPV) of this investment option?
b. Is the Investment option feasible?
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Answer #1

NPV = Present value of cash inflows - Present value of cash outflows

= (13.60*8700-6500)*PVAF(6%, 8 years) + 8000*PVF(6%, 8 years) - 530,000

= 111,820*6.210 + 8000*0.627 - 530,000

= $169,418.2

b.Yes, since NPV is positive

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