Capital Budgeting

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A company has revenues of 100 per unit sold. Current sales are 7500 units. Labor rates are 15 per hour. It takes 1.2 hours of labor to make each buggy. Material costs are 13.50 per unit. Figures are expected to remain the same permanently if the company continues to subcontract out to other companies certain phases of its process. If they invest 350,000 in new machinery and discontinue subcontracting, it can increase sales and reduce its per unit costs. Sales estimated to increase to 9000 units with the new machinery. The units will sell at the same price. Buggies will be produced with 1 hour of labor; material costs per unit will be the same. The new machinery has a 10 yr life, with no salvage value for tax purposes and no expected end of life liquidation value. The machinery will be depreciated over 7 years on a straight line basis. At the end of the 10 yr life of the machinery the company’s cash flow will return to what it would have been without the new machinery. Tax rate 30% and cost of capital 15%.

Find the NPV and Internal Rate of Return

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