JJ Enterprises is considering the purchase of a new machine that will produce th

Question

JJ Enterprises is considering the purchase of a new machine that will produce thumb drives. The new machine will require an initial investment of $100,000 and has an economic life of five years and will be fully depreciated by the straight line method. The machine will produce 12,000 thumb drives per year with each costing $2.00 to make. Each will be sold at $4.50. Assume JJ Enterprises uses a discount rate of 14 percent and has a tax rate of 34 percent. What is the NPV of the project and should JJ Enterprises make the purchase.

Explanation / Answer

Depreciation every year = 100000-0/5 i.e 20000 every year

Contribution earned on thumb drive = 4.50 - 2 i.e 2.50

Particulars Year Cash Flows PVF @ 14% PV @ 14% Initial Investment 0 -100000 1 -100000 Contribution Earned net of tax ( 12000*2.50*0.66) 1 to 5 19800 3.4331 67975.38 Tax saving on depreciation ( 20000*0.34) 1 to 5 6800 3.4331 23345.08 Net Present Value -8679.54

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