Omaha Plating Corporation Is Considering Purchasing a Machine for $1,500,000

question 116

Essay

Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine is expected to generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value. Its estimated weighted-average cost of capital (WACC) for evaluating capital expenditure proposals is 10%. Note: the PV $1 factor for 10 years, 10% is 0.386; the PV annuity factor for 10%, 10 years is 6.145; and, the PV annuity factor for 10%, 5 years is 3.791.
Required:
Using a discount rate of 10%, what is the estimated net present value (NPV) of the proposed investment (rounded to the nearest thousand)?

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Definitions:

Demand Curve

A graphical representation showing the relationship between the price of a product and the quantity of the product demanded at those prices.

Unused Capacity

The portion of a system's or facility's total capacity that is not currently being utilized for production or services.

Price Point

The price level for a product or service that is perceived as fair or competitive by customers.

Chase Strategy

A management approach that adjusts production rates to align with fluctuations in demand, aiming to match output with demand and minimize inventory costs.