I have solved this question for part A

The NPV of (purchasing ) is different from the NPV in my book answer so can you check to please my answer in the excel sheet link which I sent to you.

(1)This is the link to my answer

https://cbfsedu-my.sharepoint.com/:x:/g/personal/st05570_cbfs_edu_om/EcnommnGBiJAjsdEJCcvBAoBcBhl_axyj2o5c6vb4x5UHg?e=M8bKJX

(2)Question

(3)BOOK ANSWER

I have solved this question for part A

The NPV for (purchasing ) is different from the NPV in my book answer so can you check please my answer in the excel sheet link.

157 AGD Co (FMC, 12/05, amended) 36 mins AGD Co is a profitable company which is considering the purchase of a machine costing $320,000; \f purchased, AGD Co would incur annual maintenance costs of $25,000. The machine would be used for 3 years and at the end of this period would be sold for $50,000. Alternatively, the machine could be obtained under a 3-year lease for an annual lease rental of $120,000 per year, payable in advance. The lease agreement would also provide insurance and maintenance for a three-year period. The lease also contains an annual break clause allowing the lease to be exited at the lessee's discretion. AGD Co can claim tax-allowable depreciation on a 25% reducing balance basis. The company pays tax on profits at an annual rate of 30% and all tax liabilities are paid one year in arrears. AGD Co has an accounting year that ends on 31 December. If the machine is purchased, payment will be made in January of the first year of operation. If leased, annual lease rentals will be paid in January of each year of operation. Required (a) Using an after-tax borrowing rate of 7%, evaluate whether AGD Co should purchase or lease the new machine. (12 marks) Lolconravida non financial bonafit Present value of purchase costs Year 0 $'000 Year 1 $'000 Year 2 $'000 Year 3 $'000 Year 4 $'000 Cash outflows Capital costs Annual maintenance costs (320) (25) (25) (25) (25) (25) (320) (25) 0 50 Cash inflows Disposal proceeds Taxation (at 30% in following year) Tax-allowable depn (W) 8 24 32 7 0.873 6 8 18 76 51 0.816 42 8 39 47 47 0.763 36 (320) 1.000 Net cash flows Discount at 7% PV of cash flow (25) 0.935 (23) (320) ($259k) NPV of cash flow Working: Tax-allowable depreciation Tax- allowable depn $'000 Tax benefit $'000 Year of cash flow $'000 320 Initial investment Allowances at 25% pa on a reducing balance basis over 3 years Year 1 (80) 24 Y2 (80) 240 (60) 180 Year 2 (60) 18 Y3 Year 3 Proceeds on sale Balancing allowance (50) 130 39 Y4