FIN 401 Lecture Notes - Lecture 5: Presto Card, Variable Cost
Document Summary
A simple capital budgeting problem: suppose a firm is considering purchasing a new machine. The machine will be operated for 3 years. At the end of 3 years the machine can be sold for ,000. The machine will produce 2,000 units per year. The variable cost per unit will be . The fixed operating costs are ,000 per year. The required rate of return (the discount rate, or cost of capital) is 10%. The project requires an initial investment in operating net working capital of . Thereafter operating net working capital will be 10% of sales. Cost cutting problem: a company is considering the purchase of a new machine. The company believes that revenues will remain at their current levels, however operating costs will be reduced by ,000 per year. The machine is expected to operate for 10 years. It will sold for its salvage value of ,000 at year 10.
