New oven would cost $685,000, including cost of equipment, shipping and installation. No increase in capcity with new oven, however operating expenses would be reduced by $105,000. 7 year MACRS schedule to a value of zero will be used, however the oven can be sold in year 10 for $30,000. Cost will increase by 5% per year over the 10 year economic life.
Another project being considered is a semiautomated packing unti that would cost $390,000 including installation. This project would also use the 7 year MACRS schedule with no residual value. Wrapping machine was purcashed four years ago for $90,000 the wrapper has a current market value of $20,000. The packing unit will result in a saving in operating expenses of $90,000 per year. These expenses will increase by 5% per year over the 10 year economic life.
What is the NPV of the 2 projects and which should be accepted? The factory owner has $1,000,000 to commit to capital projects this year.
Given partial balance sheet: Current liabilities= $1,000,000; Mortage Bond= $5,143,000; Common Stock(500,000 shares)= $500,000; Contributed capital in excess of par= 2,000,000; Retained earnings= $8,640,210; total liablities and common equity= $17,283,210