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Parker Industries is considering purchasing a new machine, instead of preparing its product by hand. The machine would cost $90,000. It would have a life of five years, but would require a $5,000 overhaul at the end of the third year. After five years, the machine could be sold for $15,000. The machine will cost $17,000 per year to operate. The company currently incurs a direct labor cost of $40,000 per year. This cost will not be incurred if the new machine is purchased. The machine will also allow the company to produce an additional 5,000 units per year. The company realizes a contribution margin of $0.70 per unit. Evans requires a 10% return on all investments in equipment. (Ignore taxes)

-What is the approximate net present value?

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Use the following to answer questions:
Parker Industries is considering purchasing a new machine, instead of preparing its product by hand. The machine would cost $90,000. It would have a life of five years, but would require a $5,000 overhaul at the end of the third year. After five years, the machine could be sold for $15,000. The machine will cost $17,000 per year to operate. The company currently incurs a direct labor cost of $40,000 per year. This cost will not be incurred if the new machine is purchased. The machine will also allow the company to produce an additional 5,000 units per year. The company realizes a contribution margin of $0.70 per unit. Evans requires a 10% return on all investments in equipment. (Ignore taxes)
 
-What is the approximate net present value?

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting future cash flows to their present value and subtracting the initial investment. Without specific cash flow details and discount rate, it's assumed that $16,000 is the closest estimate to the NPV calculation.

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