Assume 30 yrs

FIN4801 JANUARY/FEBRUARY 2020 Question 1 [25 marks] Grapes Limited has to replace a boxing machine that is crucial to its operations. The existing machine does not have the capacity that the company requires. The management of the firm has identified a possible new machine to replace the existing one, which has a book value and scrap value of zero. You have been tasked to evaluate the financial acceptability of the new machine. This will assist management, since they will have objective information regarding which of the machines to investigate further and discuss with possible suppliers. The bookkeeper of the company provided you with the following information: The company is taxed at 28%. The machine will be depreciated on a straight-line basis over the usable life of the project. The company adjusts its weighted average cost of capital (WACC) of 19%, for the risk inherent in a project by multiplying it by a factor given the coefficient of variation (CV) associated with the sales generated by the project as per the table below: CV 0.1 -0.25 0.26 - 0.65 0.65