Problem:
The Manager of the Webster Manufacturing Company is considering the purchase of a new piece of manufacturing equipment, which will expand the company's product line. The equipment has a cost of $120,000 and has no anticipated sales, profits from the use of equipment are estimated to be:
- Year 1 - $30,000
- Year 2 - 40,000
- Year 3 - 50,000
- Year 4 - 60,000
The cost of capital to the company has been calculated to be 9%
Requirement:
Question: Provide the manager with (a) the Pay-back Period and (b) the Net Present Value, associated with the potential purchase. Explain the results of your financial analysis and the importance of this process.
Note: Provide support for your underlying principle.