Answer Happy

Machine Ci C C3 A CO -$45 mil. -50 -25 -25 -25 B -20 -20 2) A toy company is planning to invest in a new fully automated factory which will produce toys using robots. These robots will be installed to a production space company owns, which would otherwise earn no rent. Initial investment required to purchase robots is $800,000 and robots have a lifespan of 10 years. This investment will be depreciated to a salvage value of zero using straight-line depreciation over 10 years. The company expects to generate $500,000 revenue from the sales of toys produced in this factory each year. Since process is fully automated there are no fixed costs and variable costs will be 80% of sales. Discount rate is 10% and tax rate is 40%. a) Calculate the NPV of this project. b) Consider a scenario where the company develops a more efficient production process which will use the same robots. This new process will require a larger production space, so the company has to rent a new space and pay $20,000 rent per year in fixed costs. However, using this process variable costs will be 60% of sales. Calculate NPV of the project under this scenario.