International Finance - Case Study Example

The new equipment will have a useful life of 10 years. The equipment being replaced had a book value of Pts. 1,605,000 and a market value of Pts. 950,000 meaning a Pts. 655,000 loss on disposal. The net present value rule states that an investment should be accepted if its net present value is greater than zero and rejected otherwise. The new equipment produced by Brevetti Cea, s.p.a ,an Italian firm has a number of benefits including larger production volumes, inspection and rejection thresholds are easily adjustable and the machine does not require specially trained operators.

The fact that the new machine does not need trained personnel means that new employees can within no time learn how to handle the new equipment as compared to the 2 or 3 months needed to earlier train them. The semi-automated, old model inspection equipment has operational costs of Pts. 88,496 in 1988, which are expected to gradually rise to Pts. 124,872 in 1997. The new photoelectric equipment has relatively lower operational costs of Pts. 69,676 in 1988 which are expected to rise to Pts. 98,318 in 1997.

Use of the new photoelectric equipment is expected to result in savings in operational expenses. After this 10 year period, the new photoelectric equipment would have exhausted its useful life. Cash flows relevant to the new photoelectric equipment include; the initial Pts. 61.525 million or $500,000. The savings in the materials and labor cost, that is the difference in the operational costs of the old model equipment versus the new efficient equipment consists cash inflows or savings. The revenues or cash sales anticipated from assimilation of the photoelectric equipment are however unstipulated.

There is also a loss of Pts. 655,000 on disposal of the old equipment, as its net book value is Pts. 1,605,000 and its market value is Pts. 950,000. Merck considers the savings