Kowloon Company’s plant produces door and window systems for sale to large construction companies. The company is considering installing a new computer and material handling system. The system will cost $5.5 million and will have a 10-year useful life. At the end of the tenth year, the company expects to sell the system for $1 million if an overhaul is to be incurred for $500,000 in Year 5. Service improvements will result in a $1 million increase in revenue during the first year and this increase will grow by 5% each year thereafter. Kowloon’s total amount of variable cost of goods sold and variable selling expenses are about 40% of sales each year. In addition, annual material handling costs will be increased by $150,000, and annual rental costs are expected to be reduced by $80,000. The company’s minimum required rate of return is 15%. All revenues and expenses are cash receipts and cash payments. All cash flows (except initial investment) are assumed to occur at the end of each period. (a.) Evaluate the feasibility of the investment by using the NPV method (round your answer to 2 decimal places). b. Explain any non-financial considerations in the purchase decision
Kowloon Company’s plant produces door and window systems for sale to large construction companies. The company is considering installing a new computer and material handling system.
The system will cost $5.5 million and will have a 10-year useful life. At the end of the tenth year, the company expects to sell the system for $1 million if an overhaul is to be incurred for $500,000
in Year 5. Service improvements will result in a $1 million increase in revenue during the first year and this increase will grow by 5% each year thereafter. Kowloon’s total amount of variable cost of goods sold and variable selling expenses are about 40% of sales each year.
In addition, annual material handling costs will be increased by $150,000, and annual rental costs are expected to be reduced by $80,000. The company’s minimum required
(a.) Evaluate the feasibility of the investment by using the
b. Explain any non-financial considerations in the purchase decision
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