Question
HoT Technologies Limited is deciding whether it should invest in a machine that cost $300,000. The machine would be fully depreciated over 5 years using
HoT Technologies Limited is deciding whether it should invest in a machine that cost $300,000. The machine would be fully depreciated over 5 years using the straight-line depreciation method. With the machine, the firm projects that it will generate $120,000 in sales revenue annually, while the cost will increase by $50,000 annually. The firm would need an additional net working capital of $20,000. The firms cost of capital is 10% and has a tax rate of 20%.
(i) What is the initial investment of this project?
(ii) What is the annual operating cash flow of this project?
(iii) Assume that the firm can sell the machine for $10,000 at the end of 5 years. Calculate the terminal cash flow of this project.
(iv) Calculate the net present value (NPV) of this project.
(v) Should the firm go ahead with the purchase of the machine? Give your reason(s).
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