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XYZ Co

Accounting

XYZ Co. is interested in purchasing a state-of-the-art widget machine for its manufacturing plant. The new machine has been designed to basically eliminate all errors and defects in the widget-making production process. The new machine will cost $150,000, and have a salvage value of $70,000 at the end of its seven-year useful life. XYZ has determined that cash inflows for years 1 through 7 will be as follows: $32,000; $57,000; $15,000; $28,000; $16,000; $10,000, and $15,000, respectively. Maintenance will be required in years 3 and 6 at $10,000 and $7,000 respectively. XYZ uses a discount rate of 11 percent and wants projects to have a payback period of no longer than five years.

 

a.

Compute the net present value of the new machine.

 

b.

Compute the firm's profitability index.

 

c.

Compute the payback period.

 

d.

Evaluate this investment proposal for XYZ Co.

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