## Corporate Finance

rishabhhurkat
Good Student
Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

### Corporate Finance

Plasma Inc is considering the purchase of an automatic capping machine to reduce labour costs. The machine is projected to save Plasma \$5,000 per year. The machine costs \$40,000 and is expected to last for 15 years. Plasma has estimated that their cost of capital for such an investment is 10%. For an extra \$750 per year, Plasma can get a “Good As New” service contract. The contract keeps the machine in new condition forever. Net of the cost of the service contract, the machine would produce cash flows of \$4250 per year in perpetuity. Which of the following decisions is the most appropriate?
a. Plasma should not avail of the service contract Incorrect
b. Plasma’s profitability would increase if it accepts the service contract Correct
c. Plasma should not accept the entire project in the first place Incorrect

The NPV for purchase of machine only is negative (-\$1970), however with the service contract the NPV is positive \$2500 and the IRR is more than the WACC of the firm (10.81%).

Please explain me how come NPV of \$2500 and IRR of 10.81% is Calculated??

Posts: 3
Joined: Mon Mar 07, 2016 6:02 am

### Re: Corporate Finance

in this calculation we have given things are
PMT=\$5000
Number of years=15
cost of capital=10% and FV=0 then PV=38030.39 from this following values which are given,
NPV=PV-Out Flow
=38030.39-40000
NPV= -1969.61
however for the service contract
PV is 42500 and Cost is 40000 new NPV=2500
and the NPV is positive it means that you are paying less than the asset worth, and it is because of service contract.

rishabhhurkat
Good Student
Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

### Re: Corporate Finance

Ok...Got it...Thank You Very Much