ACME manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labour than the existing line. The new line would cost $1 million, have a 5-year life, and would be depreciated using the straight-line depreciation method over 5 years. At the end of 5 years, the new line could be sold as scrap for $200 000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in a saving of $40 000 per year before tax and unadjusted for inflation (in today's dollars). Additional sales with the new machine are expected to result in additional net cash inflows, before tax, of $60 000 per year (in today's dollars). If ACME invests in the new line, a one-time investment of $10 000 in additional working capital will be required. The tax rate is 30 per cent, the opportunity cost of capital is 10 per cent, and the annual rate of inflation is 3 per cent. What is the NPV of the new production line? The alternative to investing in the new production line is to overhaul the existing line, which currently has both a book value and a salvage value of $0. It would cost $300 000 to overhaul the existing line, but this expenditure would extend its useful life to 5 years. The line would have a $0 salvage value at the end of 5 years. The overhaul outlay would be capitalised and depreciated using straight-line method of depreciation over 5 years. Should ACME replace or renovate the existing line? (b) (c) Required: Produce a spreadsheet to analyse this scenario, where the parameters in yellow above are subject to change or not necessarily fixed. (a) [2 marks] What is the project NPV of replacing the existing line? Produce a graph of this NPV as a function of the nominal required rate of return. [1 mark] What is the project NPV of renovating the existing line? Produce a graph of this NPV as a function of the nominal required rate of return. Which option would you choose? (1 mark] What is the project NPV if the cost savings from the new line are $20,000 per annum before tax? Produce a graph of this NPV as a function of the cost savings from the new line. (d) [1 mark] What is the project NPV if the new line is sold for only $100,000 at the end of year 52 Produce a graph of this NPV as a function of the sale price of the new line. (e) [2 marks] Imagine you are the Chief Financial Officer (CFO) of a company. Using your answers from (a)-(d) above, write a 600 word summary for the Chief Executive Officer (CEO) summarizing whether the new line should be accepted or not, and the risks to the company if the new line is accepted. The 600 words should include interpretation of the graphs in parts (a)-(d) above. In addition, perform a scenario analysis ("Best case", "Most Likely Case", "Worst Case") in your 600-word summan A company is considering the replacement of an old machine with a new machine. The old machine was purchased 3 years ago for $12,000. Additional information relating to these machines is as follows (all cash flows are expressed in nominal terms): Item Market Value (now) Service Life (when purchased) Residual Value in 5 years' time Operating Revenue Depreciation Method Old Machine $6,500 8 years $0 $1,500 Straight line New Machine $8,000 5 years $1,000 $2,000 Straight line Assume that the incremental operating expenses (before depreciation) of buying the new machine is equal to $0, calculate the net present value of replacing the old machine with the new machine. Company tax rate = 30%. The real required rate of return is 7 percent per annum and the anticipated inflation rate is 3 percent per annum. Required: Produce a spreadsheet to analyse this scenario, where the parameters in yellow above are subject to change or not necessarily fixed. (a) (b) (c) (d) [2 marks] What is the project NPV of replacing the new machine with the old machine? Produce a graph of this NPV as a function of the real required rate of return. [1 mark] What is the project NPV of replacing the new machine with the old machine, if inflation turns out to be 5% per annum? Produce a graph of this NPV as a function of the inflation rate. [1 mark] What is the project NPV of replacing the new machine with the old machine, if the operating revenue from the old machine turns out to be $2,500? Produce a graph of this NPV as a function of revenue from the old machine. [1 mark] What is the project NPV of replacing the new machine with the old machine, if the operating revenue from the new machine turns out to be $3,000? Produce a graph of this NPV as a function of the revenue from the new machine. [2 marks] Imagine you are the Chief Financial Officer (CFO) of a company. Using your answers from (a)-(d) above, write a 600 word summary for the Chief Executive Officer (CEO) summarizing whether this project should be accepted or not, and the risks to the company if the project is accepted. The 600 words should include interpretation of the graphs in parts (a)-(d) above. In addition, perform a scenario analysis (Best case", "Most Likely Case, Worst Case) in your 600-word summary (e) ACME manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labour than the existing line. The new line would cost $1 million, have a 5-year life, and would be depreciated using the straight-line depreciation method over 5 years. At the end of 5 years, the new line could be sold as scrap for $200 000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in a saving of $40 000 per year before tax and unadjusted for inflation (in today's dollars). Additional sales with the new machine are expected to result in additional net cash inflows, before tax, of $60 000 per year (in today's dollars). If ACME invests in the new line, a one-time investment of $10 000 in additional working capital will be required. The tax rate is 30 per cent, the opportunity cost of capital is 10 per cent, and the annual rate of inflation is 3 per cent. What is the NPV of the new production line? The alternative to investing in the new production line is to overhaul the existing line, which currently has both a book value and a salvage value of $0. It would cost $300 000 to overhaul the existing line, but this expenditure would extend its useful life to 5 years. The line would have a $0 salvage value at the end of 5 years. The overhaul outlay would be capitalised and depreciated using straight-line method of depreciation over 5 years. Should ACME replace or renovate the existing line? (b) (c) Required: Produce a spreadsheet to analyse this scenario, where the parameters in yellow above are subject to change or not necessarily fixed. (a) [2 marks] What is the project NPV of replacing the existing line? Produce a graph of this NPV as a function of the nominal required rate of return. [1 mark] What is the project NPV of renovating the existing line? Produce a graph of this NPV as a function of the nominal required rate of return. Which option would you choose? (1 mark] What is the project NPV if the cost savings from the new line are $20,000 per annum before tax? Produce a graph of this NPV as a function of the cost savings from the new line. (d) [1 mark] What is the project NPV if the new line is sold for only $100,000 at the end of year 52 Produce a graph of this NPV as a function of the sale price of the new line. (e) [2 marks] Imagine you are the Chief Financial Officer (CFO) of a company. Using your answers from (a)-(d) above, write a 600 word summary for the Chief Executive Officer (CEO) summarizing whether the new line should be accepted or not, and the risks to the company if the new line is accepted. The 600 words should include interpretation of the graphs in parts (a)-(d) above. In addition, perform a scenario analysis ("Best case", "Most Likely Case", "Worst Case") in your 600-word summan A company is considering the replacement of an old machine with a new machine. The old machine was purchased 3 years ago for $12,000. Additional information relating to these machines is as follows (all cash flows are expressed in nominal terms): Item Market Value (now) Service Life (when purchased) Residual Value in 5 years' time Operating Revenue Depreciation Method Old Machine $6,500 8 years $0 $1,500 Straight line New Machine $8,000 5 years $1,000 $2,000 Straight line Assume that the incremental operating expenses (before depreciation) of buying the new machine is equal to $0, calculate the net present value of replacing the old machine with the new machine. Company tax rate = 30%. The real required rate of return is 7 percent per annum and the anticipated inflation rate is 3 percent per annum. Required: Produce a spreadsheet to analyse this scenario, where the parameters in yellow above are subject to change or not necessarily fixed. (a) (b) (c) (d) [2 marks] What is the project NPV of replacing the new machine with the old machine? Produce a graph of this NPV as a function of the real required rate of return. [1 mark] What is the project NPV of replacing the new machine with the old machine, if inflation turns out to be 5% per annum? Produce a graph of this NPV as a function of the inflation rate. [1 mark] What is the project NPV of replacing the new machine with the old machine, if the operating revenue from the old machine turns out to be $2,500? Produce a graph of this NPV as a function of revenue from the old machine. [1 mark] What is the project NPV of replacing the new machine with the old machine, if the operating revenue from the new machine turns out to be $3,000? Produce a graph of this NPV as a function of the revenue from the new machine. [2 marks] Imagine you are the Chief Financial Officer (CFO) of a company. Using your answers from (a)-(d) above, write a 600 word summary for the Chief Executive Officer (CEO) summarizing whether this project should be accepted or not, and the risks to the company if the project is accepted. The 600 words should include interpretation of the graphs in parts (a)-(d) above. In addition, perform a scenario analysis (Best case", "Most Likely Case, Worst Case) in your 600-word summary (e)