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(a) Mega Manufacturing Limited is evaluating whether it should invest in new equipment that cost $5,000,000. With the new equipment, it will be able to
(a) Mega Manufacturing Limited is evaluating whether it should invest in new equipment that cost $5,000,000. With the new equipment, it will be able to generate an additional $1,500,000 annually, while its costs will rise by an additional $400,000 annually. The accountant has advised that the equipment should be fully depreciated by five years using the straight-line depreciation method. The firm would need an additional net working capital of $300,000 to fund accounts receivables, account payables and inventories. Given the firm's cost of capital is 6% and its tax rate is 20%, calculate the following: (i) Calculate the initial investment of the new equipment. (3 marks) (ii) Calculate its the annual operating cash flows of the new equipment. (5 marks) (iii) The firm believes that it can sell the equipment for $2,000,000 at the end of five years. Calculate its the terminal cash flows of these machines. (4 marks) (iv) Calculate the net present value (NPV) of the planned purchase. (6 marks) (v) Should the firm go ahead with the purchase of the equipment? Explain your answer. (2 marks)
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