Cannon Company is considering investing in new machinery to modernize its produc
ID: 2563259 • Letter: C
Question
Cannon Company is considering investing in new machinery to modernize its production process The machine cost $600,000 and will last for six years. It will allow a reduction of two employees in the work force. The salary and benefits of the two employees total $95,000 per year. Severance pay for the laid-off workers amounts to $30,000 each. The machinery will also save $23,600 per yea by reducing materials waste. The machine will require the replacement of several parts in the four year at a cost of $45,000. It can be sold for $55,000 at the end of six years Cannon requires an 6% return on all investments. Compute the net presentvalue of investing in the machinery SExplanation / Answer
NPV of the asset is the difference between PV of all the cash inflow from the asset and initial cash out flow
Initial cash flow = Cost of asset + Severance pay of both employee
= 600000 + 60000
= 660000
Annual saving is = 95000 + 23600 = 118600
5th year cash flow = 118600 – parts replacement cost
= 118600 – 45000
= 73600
Year
Cash flow
PV factor @ 6%
PV of cash inflow
1
118600
0.9434
111886.7925
2
118600
0.8900
105553.5778
3
118600
0.8396
99578.84697
4
73600
0.7921
58298.09361
5
118600
0.7473
88624.8193
6
118600
0.7050
83608.3201
6
55000
0.7050
38772.82972
Total
586323.28
PV of cash inflow is 586323.28
Let’s calculate the NPV of the asset by putting the values I the above mention NPV formula’
NPV = 586323.28 – 660000
= (73676.72)
Year
Cash flow
PV factor @ 6%
PV of cash inflow
1
118600
0.9434
111886.7925
2
118600
0.8900
105553.5778
3
118600
0.8396
99578.84697
4
73600
0.7921
58298.09361
5
118600
0.7473
88624.8193
6
118600
0.7050
83608.3201
6
55000
0.7050
38772.82972
Total
586323.28