FInancial Management:

George is currently considering the replacement of an old grinder in his workshop. The old grinder was purchased 3 years ago for $40,000. It is being depreciated using the prime (straight line) depreciation method. Its life is 5 years with no salvage value at the end of the 5th year. A trader has offered George $25,000 for the old grinder The new grinder which George would like to purchase costs $70,000. The installation cost is S5,000. This grinder would also be depreciated over 5 years using the prime method. However, at the end of the 5th year, its expected sales value is $5,000. The new grinder requires an increase of $7,550 in net working capital. Tax rate is 30% Annual revenue and expenses before depreciation, interest and tax are estimated below: PERIOD NEW GRINDER OLD GRINDER Revenue 500,000 500,000 500,000 500,000 500,000 Revenue Year 1550,000 Year 2 575,000 Year 3600,000 Year 4 625.000 Year 5625,000 Expenses 490,000 505,000 525,000 545,000 545,000 Expenses 445,000 445,000 445,000 445,000 445,000 1) Calculate the initial investment associated with the new grinder 2) Calculate the relevant (incremental) operating net cash flows. Explain why interest should not 3) Calculate the terminal cash flows 5) Calculate the net present values of the incremental cash flows using costs of capital of 8.00%, be included as a project cost. 4) Prepare a table with all the incremental cash flows of the project. 12.00%, 16.00% and 20.00%. Comment on the change in the NPV when the cost of capital changes change accordingly? accepted? 6) Calculate the internal rate of return. If the cost of capital changes, will the internal rate of return 7) At which cost of capital (analyse the four situations given in part 5) will the project be NOTE: Please provide all workings, calculations and explanations. Marks are given throughout the assignment answers. A right process but wrong end results will still receive marks