Question
Brookite Company (BC) wants to purchase a new machine costing $500,000 which will last 12 years to make Hoverboard - a new product. Because BC
Brookite Company (BC) wants to purchase a new machine costing $500,000 which will last 12 years to make Hoverboard - a new product. Because BC deals in products that are consumer oriented where tastes change rapidly, they assume a useful life for their products of 5 years. This machine could be sold for $200,000 at the end of Year 5 or for $50,000 at the end of 12 years.
- Brookite will have to increase its inventory and accounts receivable by $150,000 at the beginning of year 1 and by an additional $50,000 at the beginning of Year 2. They can recover only $150,000 of this working capital investment at the end of Year 5.
- Assume all of the following cash inflows occur at the end of the year.
- The new product revenues are expected to be as follows:
Year 1 $400,000
Year 2 $500,000
Year 3 $700,000
Year 4 $700,000
Year 5 $300,000
- Cash outflows for the production of the Hoverboard will be 50% of revenues in Years 1, 2, and 3 and 60% of revenues in Years 4 and 5.
- BC will spend $100,000 on an advertising campaign in Year 1
- An additional $20,000 will be spent on advertising each year for years 2-5 (treat as an annuity)
- As part of the decision whether to make the Hoverboard, BC spent $100,000 on a preliminary market study last year.
- The machine will be in a CCA class where the rate is 20% . Taxes are 40% and Brookite requires 10% rate of return.
Should Brookite Company purchase this new machine? Include a calculation of the net present value, margin of safety and discounted payback .Also include qualitative points that should be considered and show all calculations
Step by Step Solution
3.58 Rating (162 Votes )
There are 3 Steps involved in it
Step: 1
To determine whether Brookite Company should purchase the new machine we need to calculate the net present value NPV margin of safety and discounted payback First lets calculate the annual cash flows ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started