Question
Engineering Company Pty. Ltd. is considering a proposal to purchase an additional spray machine for its repair shop. The finance officer of the company has
Engineering Company Pty. Ltd. is considering a proposal to purchase an additional spray machine for its repair shop. The finance officer of the company has gathered the following data/ information relevant to the machine. Purchase and Installation cost of the machine $ 120,000 Useful life of the machine 5 Years Estimated salvage value at the end of 5 years $ 5,000 Net cash inflow that will be generated by the machine from end of year 1 to the end of year 5, before deducting depreciation and income tax, is estimated at $ 40,000 per year. Although the machine will have a useful life of 5 years, the Tax Department will allow the company to fully depreciate the machine in 4 years. To take advantage of this tax rule, the company will depreciate the machine in full over the first 4 years, ignoring the estimated salvage value. The new spray machine will require an incremental investment in working capital of $10,000.This will be fully recovered at the end of the machine's working life. The applicable tax rate for the Engineering Company is 30% and the after-tax required rate of return (cost of capital) is 10%.
You are required to:i) Calculate the NPVii) Make a recommendation based on the NPV
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To calculate the Net Present Value NPV of the proposal we need to consider the cash flows associated with the purchase installation net cash inflows d...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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