Question
Bottle Limited is considering replacing its current bottling machine with a newer and more efficient one. The current machine has a book value of $25,000
Bottle Limited is considering replacing its current bottling machine with a newer and more efficient one. The current machine has a book value of $25,000 and has 5 years useful life remaining. If it was sold now the firm could raise $25,000.
The price to purchase a new machine is $240,000, and shipping and installation costs would be $10,000. Estimated useful life of the new machine is 5 years, and at the end of its useful life it is estimated that it will have a salvage value of $50,000.
If installed, the new machine is expected to increase gross revenues by $65,000 per annum and annual operating costs would also decrease by $15,000 per annum.
There would be a $20,000 increase in working capital, only 20% of which is recoverable at the end of the machines life.
Capital Allowances is available on the straight line basis.
The companys cost of capital is 20%
The tax rate is 40%
Required :
(i ) What is the initial investment
(ii ) What is the annual operating after tax cash flow
(iii ) Determine the terminal cash flow .
( iv ) Compute the Net Present value of the investment and advise
the company if it should go ahead with the project.
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