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| Marshall Marshall is considering purchasing a new machine to increase the capacity of its production facilities. At the moment it uses a machine which can process 400 units of product Z per hour. Marshall could replace this old machine with a new machine, the 'Zoom', which is product specific and can produce 1,000 units per hour. The Zoom will cost $1,000,000 to purchase. If installed, three members of staff will have to attend a training course, which will cost the company a total of $8,000. The organisation expects the demand for product Z to be 1,152,000 units per annum for the next three years. After this, in the fourth year, the Zoom would be scrapped and sold for $100,000. The existing machine will have no scrap value. Each unit of product Z earns a contribution of $2.80. The organisation works a 40-hour week for 48 weeks in the year. Marshall normally expects payback within two years and its after tax cost of capital is 10% per annum. The organisation pays tax on profits at 30% one year in arrears, and receives writing down allowances of 25% on the reducing balance basis. The organisation's financial year begins on the same day that the new machines would start operating, if purchased. Required (a) Calculate the net present value of the proposed investment, and advise the management of Marshall as to whether it should proceed with the purchase. (16 marks) |