ABS Capital Budgeting: NPV Analysis of Plywood Press Investments

To calculate the NPV of each machine, we need to first calculate the annual cash inflows and outflows for each machine over the seven-year time horizon of the project.

For the Nakoi press:

Annual Sales Revenue = Output per day * Market price per square foot * Days used each year = 6,000 * $1.80 * 240 = $2,073,600

Annual Material Costs = Annual Sales Revenue * Material costs = $2,073,600 * 0.72 = $1,493,952

Annual Labour Costs = $276,000

Annual Maintenance Costs = $52,000

Annual Overhead Costs = $78,000

Annual Cash Outflows = Annual Material Costs + Annual Labour Costs + Annual Maintenance Costs + Annual Overhead Costs = $1,899,952

Annual Cash Inflows = Annual Sales Revenue - Annual Cash Outflows = $173,648

To calculate the net present value (NPV) of the Nakoi press, we can use the NPV formula in Excel:

=NPV(0.17, -750000, 173648, 173648*(1+0.04)^1, 173648*(1+0.04)^2, 173648*(1+0.04)^3, 173648*(1+0.04)^4, 173648*(1+0.04)^5, 173648*(1+0.04)^6, 173648*(1+0.04)^7 + 75000)

This gives us an NPV of $152,318.

For the Dakota press:

Annual Sales Revenue = Output per day * Market price per square foot * Days used each year = 7,000 * $1.80 * 240 = $2,426,400

Annual Material Costs = Annual Sales Revenue * Material costs = $2,426,400 * 0.72 = $1,748,608

Annual Labour Costs = $226,000

Annual Maintenance Costs = $60,000

Annual Overhead Costs = $60,000

Annual Cash Outflows = Annual Material Costs + Annual Labour Costs + Annual Maintenance Costs + Annual Overhead Costs = $2,094,608

Annual Cash Inflows = Annual Sales Revenue - Annual Cash Outflows = $331,792

To calculate the NPV of the Dakota press, we can use the same formula as above:

=NPV(0.17, -1300000, 331792, 331792*(1+0.04)^1, 331792*(1+0.04)^2, 331792*(1+0.04)^3, 331792*(1+0.04)^4, 331792*(1+0.04)^5, 331792*(1+0.04)^6, 331792*(1+0.04)^7 + 390000)

This gives us an NPV of $2,248,364.

Therefore, based on the NPV analysis, the Dakota press is the better investment for ABS.

Note: The information given in Exhibit 3 is not relevant for this analysis as it pertains to straight-line depreciation, which is already given in Exhibit 1.