Gustav is facing a new financial decision. His old grinding and blending equipment is showing its age and requires more frequent shutdowns. He consulted with the local maintenance team, and they suggested that the equipment can be reinvigorated. At the same time, Gustav is thinking that a new machine can improve the companys productivity, reduce maintenance costs, and decrease idle time.

Here is the information Gustav has gathered so far.

- The old grinding equipment o It has a book value of $35,000. o Gustavalreadyfoundabuyerforit;thesellingpriceis$35,000. o The annual depreciation is $6,000. o At the end of 5 years, the machine can be sold for $5,000. o Theannualmaintenanceis$8,000peryear. o it requires $30,000 to be spent immediately and another additional major maintenance of $6,000

in year 3. - The new grinding equipment

o Itcosts$140,000. o It can be depreciated over 10 years using a straight-line depreciation. o The annual maintenance starts at $3,000 per year and increases by $ 1500 per year. o Can be sold after 5 years for $60,000 o It will save $10,000, $10,500, $10,750, $11,000, and $11,250 in labor costs in years 1, 2, 3, 4, and

5. o It will increase sales by $7,000 per year.

Gustav calculated his own cost of capital (discount rate), and it is 12%. The tax rate for his business is 30%. First, you must find the FCFs.

1. a) Using the NPV analysis, advise Gustav whether he should purchase the new machine.

2. b) Using the IRR analysis, advise Gustav whether he should purchase the new machine. Do you reach the

   same conclusion?

3. c) Are there any other factors Gustav should consider when making his decision? Think about strategic,

   qualitative, and other non-financial factors. Find at least 3.

4. d) You already know that Gustav wants a thorough investigation. Therefore, he wants to conduct these

   additional analyses. Use only the NPV method for this part. What if

• - The new machine can be sold for $80,000 in 5 years.

• - The tax rate changes starting with year two to 40% due to new legislation. This legislation has not passed

  yet.

• - Sales will not increase due to a recession in the first two years, but they will increase by $4,000 starting

  with year 3. Gustav believes that the economy will experience a recessionary period in the coming years.

• - All of the above factors change at the same time.

e) Write a short recommendation for Gustav. Be specific on how you reached your conclusion.

Notes: Use excel. It will save you time with the sensitivity analysis (part d).

For part d, you will have 4 scenarios: change in selling price, change in tax rate, change in sales, all changes together.