Case Study 1\ You have been appointed as a financial analyst for the Axis International Company, a profitable retail company. The director of Finance, belonging to the capital budgeting division has asked you to analyze a replacement decision that the company is currently facing. As a financial analyst you need to evaluate the proposed acquisition of a new machine for the company's R&D department. The existing equipment can run for five more years, producing annual revenues of Rs 60,000 with cash expenses of Rs 30,000 . The book value of the existing machine is Rs20,000, and it is being depreciated at Rs 4,000 a year down to a zero book value. The machine can be sold today to net Rs 8,000 , or it can be sold in five years to net Rs5,000. The replacement machine will cost Rs50,000, plus an additional Rs20,000 to transport it to the factory and install it. It will generate revenues of Rs 90,000 , but will have cash expenses of Rs40,000. It will be depreciated using the straight-line method over five years when it will have a book of Rs20,000 and cash salvage value of Rs25,000. Using the equipment requires an increase in net working of Rs5,000. The tax rate of the company is 50 percent, and cost of capital is 10 percent. What is the differential after-tax cash flow for this proposal? Determine the NPV, IRR and PI of the proposal. Should the company replace the machine or continue with the existing one?

 

Case Study 1 You have been appointed as a financial analyst for the Axis International Company, a profitable retail company. The director of Finance, belonging to the capital budgeting division has asked you to analyze a replacement decision that the company is currently facing. As a financial analyst you need to evaluate the proposed acquisition of a new machine for the company's R&D department. The existing equipment can run for five more years, producing annual revenues of Rs60,000 with cash expenses of Rs30,000. The book value of the existing machine is Rs20, 000, and it is being depreciated at Rs4,000 a year down to a zero book value. The machine can be sold today to net Rs8,000, or it can be sold in five years to net Rs5,000. The replacement machine will cost Rs50,000, plus an additional Rs20,000 to transport it to the factory and install it. It will generate revenues of R$90,000, but will have cash expenses of Rs40,000. It will be depreciated using the straight-line method over five years when it will have a book of Rs20,000 and cash salvage value of Rs25,000. Using the equipment requires an increase in net working of Rs5,000. The tax rate of the company is 50 percent, and cost of capital is 10 percent. What is the differential after-tax cash flow for this proposal? Determine the NPV, IRR and PI of the proposal. Should the company replace the machine or continue with the existing one?