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A machine will cost $800,000 and last for five years after which it will be sold for 5% of its
initial price. Additional working capital of $90,000 will be required at the start of the first
year of operation.
Production and sales from the machine will be 100,000 units per year. Each unit can be
sold for $16 and will incur variable costs of $11. Incremental fixed costs will be $160,000
per year.
The company uses an after-tax cost of capital of 11% and pays profit tax one year in
arrears at an annual rate of 30% per year. Capital allowances and inflation should be
ignored.
Required: Calculate the NPV and IRR and advise on whether the investment is
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