ABC is considering purchasing a printing machine for 10,000 on 31 December 2021, on the last day of its financial year end.The machine generates cash flows of 7,000 per annum and will be sold for 2,000 on 31 December 2023. The company pays tax at 17% and capital allowances are available at 18% per annum on a reducing balance basis.

The expected returns on the stock market are 12% and the Bank of England base rate is 200 basis points.

Requirements:

a) Calculate the Net Present Value of the printing machine, if the company has a beta of 1.5.

(25 marks)

b) If accepting the machine doubles the company's beta to 3.0, compute the Net Present Value.