Question: A production company is considering purchasing a new piece of equipment for the production process for one of its products. The product itself is due to be withdrawn from the market in five years' time. The equipment will cost £600 000 and have a scrap value of £5000. Included in this price is a one-year service guarantee from the supplier of the equipment. Each additional year the equipment is in use the company will take out another service contract with the supplier at a cost of £7500.
Calculate the net present value for this project assuming a cost of capital of 15 per cent. Explain how this calculation might help the company in its decision making.