Djúp Veiði hf
Capital Investment Analysis
(All currency amounts converted to €.)

Djúp Veiði hf manufactures equipment for the commercial fishing industry. The company is considering an investment in a project to manufacture accessories for their existing products.
The project involves buying a machine to manufacture the accessories in-house. The machine costs €850,000, with shipping and installation charges on the machine of €37,000. Special building modifications costing €26,000 are required in order to install the machine and are considered part of the machine. These outlays occur as soon as they decide to take the investment. Special training for employees will cost €42,000 the first year, with payment due near the end of the first year.
The decision to move ahead with the project results from a pilot study conducted by outside consultants. Their report, at a cost of €77,000, suggests the accessory business would provide attractive growth opportunities.
The economic life of the product line is 6 years. They expect to be able to sell the machine at the end of six years for €65,000. The machine’s engineering life is 11 years, and it falls into the 7year depreciation class for tax purposes. Depreciation will be simplified straight-line (to a value of zero). For financial reporting purposes, the accounting group indicated the equipment would be depreciated straight-line over ten years.
If the firm accepts the project, the incremental added sales are estimated at 900 units at a price of
€475.00 per unit for the first year. They expect unit sales to grow at a rate of 8 percent per year for six years. Prices are expected to grow at a rate of 3 percent per year. First-year incremental cash operating expenses are estimated at €220,000. Due to increased attention to expense control at Djúp Veiði, the firm expects incremental expenses for the project