Clara's Custom Curtains Inc

question 48

Essay

Clara's Custom Curtains Inc.is considering the purchase of a new high-tech sewing machine.The machine will have an initial cost of $15 000 and an estimated salvage value of $1000 at the end of its useful life.The company expects annual net operating cash inflows to increase $4000 each year for six years.The company has a cost of capital of 12 per cent.
Required:
A. If the company ignores income taxes, compute the net present value of the machine.
B. If the company takes into account income taxes using a 40 per cent income tax rate, and the machine will be depreciated over its six-year life using the straight-line method, compute the net present value.

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Definitions:

Variable Manufacturing Costs

Costs that change in proportion to the level of production or sales volume, including costs such as raw materials, direct labor, and certain utilities directly involved in the manufacturing process.

Flexible Budget

A flexible budget that adapts to variations in activity levels or volumes, promoting precise budgeting and forecasting.

Manufacturing Costs

Expenses directly associated with the production of goods, including labor, materials, and overhead.

Direct Materials

The primary raw inputs used in the manufacture of products, which are directly traceable to the production process.