A large food-processing corporation is considering using laser technology to spe

Question

A large food-processing corporation is considering using laser technology to speed up and eliminate waste in the potato-peeling process. To implement the system, the company anticipates needing $3.5 million to purchase the industrial-strength lasers. The system will save $1,550,000 per year in labor and materials. However, it will require an additional operating and maintenance cost of $350,000. Annual income taxes will also increase by $150,000. The system is expected to have a 10-year service life and will have a salvage value of about $200,000. If the company's MARR is 18%, use the NPW method to justify the project.

The NPW of the project is:

Explanation / Answer

Annual Cash flow =$1550000-$350000-$150000=$1050000

NPW=-3500000+1050000[(1–(1+.18)^-10)/.18]+200000(1.18)^-10

=-3500000+1050000(4.4941)+200000(.1911)

=$1257004

NPW of project is $1257004.

Since the NPW is positive,the project can be justified.

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