Assume that your company is considering the replacement of an automated milling machine with one of the new machines offered by three different manufacturers. Each of the three machines under consideration is expected to have an economic life of five years and will result in greater daily production capacity and therefore increased sales volume. The increased volume will require an increase in working capital during the first year to a level that will remain constant until the end of the five years. The decision of which specific machine to select will depend on a net present value analysis. The old machine has reached the end of its estimated useful life and can be sold at the salvage value that was projected when the machine was first installed.Your task is to identify whether the factor would be included in the calculation for the initial investment, or the operating cash flow, or the terminal value, or is not relevant to this decision. You must also explain whether failure to appropriately include the factor in the calculation would result in overstating or understating the net present value of the project.
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