Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

ABC Printing Corporation is considering replacing its existing printing machine with a new machine which is more efficient and reliable. The company is evaluating an

ABC Printing Corporation is considering replacing its existing printing machine with a new machine which is more efficient and reliable. The company is evaluating an offer from the leading suppliers of high volume printers. The following information relates to the proposed and existing machines:

The Proposed Machine

The proposed machine will be disposed at the end of its usable life of five years at an estimated sale price of K1 300 000. The machine has an original purchase price of K14 790 000, installation cost of K150 000, and will be depreciated under the fiveyear WTA using the rates provided in the Appendix. The machine is expected to generate the following revenues and expenses:

Year

2016

2017

2018

2019

2020

Revenues

K5 000 000

K6 800 000

K4 000 000

K3 000 000

K5 000 000

Expenses(excluding

depreciation, interest, taxes)

K600 000

K800 000

K700 000

K800 000

K900 000

This machine will require increases in cash of K150 000, Accounts Receivable of K120 000, Inventories of K50 000, Accounts Payables of K250 000 and a Bank Overdraft facility of K10 000. At the end of the project, the firm is expected to recover K75 000 in working capital.

The existing Machine

The existing machine is four years old, and has a depreciable life of five years and was purchased at an installed cost of K6 000 000. This machine is also depreciated using the WTA schedule in the appendix. It is estimated that the existing machine will be liquidated at K40 000 at the end of year five (Year 2020). In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm has found a buyer for the existing equipment for K4 900 000. The firm is subject to a 35 percent tax rate on ordinary income and on longterm capital gains. The firms cost of capital is 8 percent. The revenues and expenses for the existing machine are shown below:

Year

2016

2017

2018

2019

2020

Revenues

K2 000 000

K3 000 000

K1 000 000

K1 000 000

K1 300 000

Expenses(excluding

depreciation, interest, taxes)

K500 000

K1 200 000

K600 000

K500 000

K750 000

Questions:

Calculate the:

A-Depreciation amounts for each of the years of operation of the proposed and existing machines [5 marks]

B-Initial investment for the proposed machine [10 Marks]

C-Incremental Operating Cash Flows [15 Marks]

D-Terminal Cash Flow [10 Marks]

E-Evaluate the project using the following capital budgeting techniques:

I)NPV [5 Marks]

II)IRR [2 Marks]

II)MIRR using a 10percent reinvestment rate [3 marks]

IV)Payback period assuming cash flows are received evenly throughout the year [5 Marks]

V) Recommend to the board if the project should be accepted / rejected based on the evaluation techniques used. [5 marks]

Appendix:

WTA Depreciation Schedule

Year

Depreciation Rate

1

20%

2

32%

3

19%

4

12%

5

12%

6

5%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance Operations

Authors: Charles Finley

1st Edition

1491292423, 978-1491292426

More Books

Students also viewed these Finance questions

Question

How are passive investments classified for accounting purposes?

Answered: 1 week ago