question archive Eagle Cleaners has been considering the purchase of an industrial dry-cleaning machine
Eagle Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. The new machine will cost $400,000. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $100,000 in additional cash inflows during the year of acquisition and $300,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.
What is the present value of the investment, assuming the required rate of return is 10%? Would the company want to purchase the new machine?
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