Magic Timber and Steel (Magic) has two options:

Keep the old machine, the Matrix 750, by spending money upfront to service and improve its output.

Buy the new and improved machine, the Delta A390.

The proposed investment question asks, "Should Magic buy the new machine?" Thus, only one NPV calculation is required, which will include the net of the cash flows of the two options. If the NPV is a positive number, Magic should purchase the new Delta. If the NPV is a negative number, Magic should keep the Matrix.

Your team performed NPV calculation and the following table is the result.

NPV of Purchasing Delta

Calculation of Tax

Repair costs saved (old) 28,000 Maintenance saved (old) 7,000 7,000 7,000 7,000 7,000

Major service saved (old) 4,000

Labour saving (new) 5,250 5,500 5,750 6,000 6,250

Electricity saving (new) 4,725 4,800 4,875 4,950 5,025

Maintenance (new) -2,000 -3,000 -4,000 -5,000 -6,000

Depreciation foregone (old) 6,000 6,000 6,000 6,000 6,000

Depreciation (new) -14,000 -14,000 -14,000 -14,000 -14,000

Profit/loss on sale (new)* -10,000

Taxable income 28,000 6,975 6,300 9,625 4,950 -5,725

Tax payable (saving) 8,400 2,093 1,890 2,888 1,485 -1,718

Cash Flows

Sale of MATRIX 35,000

Cost of DELTA -140,000

Scrap foregone (old) -5,000

Repair costs saved (old) 28,000

Maintenance saved (old) 7,000 7,000 7,000 7,000 7,000

Major service saved (old) 4,000

Selling price (new) 60,000

Labour saving (new) 5,250 5,500 5,750 6,000 6,250

Electricity saving (new) 4,725 4,800 4,875 4,950 5,025

Maintenance (new) -2,000 -3,000 -4,000 -5,000 -6,000

LESS TAX -8,400 -2,093 -1,890 -2,888 -1,485 1,718

CASH FLOWS -85,400 12,883 12,410 14,738 11,465 68,993

Discount factors at cost of capital 1 0.9009 0.8116 0.7311 0.6587 0.5934

Discounted cash flows (DCF) -$85,400 $11,606 $10,072 $10,776 $7,552 $40,944

Net Present Value (sum of DCF) -$4,450

Your team also performed the following sensitivity analysis

Change the discount rate to 12 per cent.

Change the Year 5 selling price of the Delta to $80,000.

Change the maintenance costs for the Delta: Year 1 costs are $1,000, increasing by $1,000 each year.

Change all of the above factors together. The results are as follows,

Change the discount rate to 12 per cent: NPV = -$7,080

Change the Year 5 selling price of the Delta to $80,000: NPV = $3,858

Change the maintenance costs for the Delta: Year 1 costs are $1,000, increasing by $1,000 each year: NPV = -$1,863

Change all the above factors together: NPV = $3,387

Before you make a final report to Mr. Davidson, you try to think of other factors that have not been considered in the NPV analysis that might have an impact on the decision (quantitative and/or qualitative). You identify these factors as bullet points in your final report, along with a few sentencesto explain their relevance.

Your final report must explain the NPV analysis and the Sensitivity analysis from your team report above, add other factors with explanation and finally make recommendation whether or not to purchase the Delta with detail reasons; the reasons must be explained thoroughly. This is a formal report to Mr. Davidson and you must explain in a professional way and it must be a 4 to 5 page long including a title page.