1. George Chung owns Chung Enterprises and is in need of a drilling machine as technology is quickly changing.
2. The best machines are available in both Canada and Mexico. He has taken advice from his mother and will purchase the DC1 from Mexico. Once the decision is made to purchase, he will need to travel to Mexico to undertake training. This will cost $21,000 and is tax deductible in year 0.
3. The DC1 will cost $750,000 and should be able to be sold for $95,000. The accountant has advised that the machine will be depreciated over 10 years. The ATO however requires depreciation over 7 years. It is expected that the machine will be kept for 5 years by Chung Enterprises so any evaluation must be undertaken over a 5 year period. It will be sold after 5 years which is the projects life.
4. George will need to borrow 50% of the value of the DC1 from the Northern Bank. The loan will be at a fixed rate of 12% p.a. over 8 years, with interest only payable at the end of each year. The principal is repayable at the end of the fifth year.
5. The old machine was purchased four years ago and at that time was expected to have an economic life of 5 years. It cost $300,000 and Cathy has been depreciating it using straight-line depreciation over five years as required by the ATO. George expects he will receive $75,000 if he sells the old machine. It is expected to be sold in period 0 if the new machine is purchased.
6. The DC1 machine is state-of-the-art, and much more efficient than the old machine. The old machine costs $650,000 per annum to operate, whereas the DC1 machine will only cost about $100,000 per annum to operate.
7. Due to the different manner in which the DC1 operates, it will be necessary to purchase an additional $180,000 of inventory in year 0.
8. Malcolm will need less staff as a result of the new machine. This will require a payout of $150,000 in year 0 and save wages of $85,000 per year. These amounts are tax deductible.
9. All cash flows are given in nominal terms.
10. The real rate of interest currently in the economy is 9% and inflation is 4%.
11. The corporate tax rate is 25%. Assume tax is paid in the year of income.
12. The new machine will generate yearly revenue of $6m while the old machine was only able to generate annual revenue of $2m.
13. Assume that all incremental revenues (as identified in line 12 above) and expenses (as identified in line 6 above) continue to year 5. That is, include these incremental amounts in your calculation in question 8.

1) What amount of the trip to Turkey should be included when undertaking the NPV analysis?

2) The after tax impact from Northern Bank to be included in the NPV calculation is?

3) The depreciation tax shield (tax benefit per annum) for the new machine is?

4) The lost depreciation tax shield (tax benefit per annum) for the old machine is in year 4 is?

5) Malcolm has to purchase additional inventory. The cash flow impact of this in year 5 will be?

6) The Cash Flow in period 0 is?

7) The appropriate discount rate to use in deciding whether Malcolm should buy the new machine is?

8) The Free Cash Flow in year 5 is?