Malcolm Jones owns the Persimmon Publishing Company and is in need of a new printing machine as technology is quickly changing The best machines are available in both Germany and Denmark Malcolm has taken advice from a former colleague and will purchase the RZ200 from Germany Once the decision is made to purchase, he will need to travel to Germany to undertake training This will cost $12,000 and is tax deductible in year 0 The RZ200 will cost $400,000 and should be able to be sold for $50,000 The accountant has advised that the machine will be depreciated over 8 years The ATO however requires depreciation over 6 years It is expected that the machine will be kept for 5 years by Persimmon Publishing Company so any evaluation must be undertaken over a 5 year period It will be sold after 5 years which is the projects life Malcolm will need to borrow 90 of the value of the RZ200 ($360,000) from the Eastern Bank The loan will be at a fixed rate of 8 p a over 5 years, with interest only payable at the end of each year The principal of $360,000 is repayable at the end of the fifth year The old machine was purchased two years ago and at that time was expected to have an economic life of 5 years It cost $180,000 and Malcolm has been depreciating it using straight line depreciation over five years as required by the ATO Malcolm expects he will receive $70,000 if he sells the old machine It is expected to be sold in period 0 if the new machine is purchased The RZ200 machine is state of the art, and much more efficient than the old machine The old machine costs $250,000 per annum to operate, whereas the RZ200 machine will only cost about $50,000 per annum to operate Due to the different manner in which the RZ200 operates, it will be necessary to purchase an additional $40,000 of inventory in year 0 Malcolm will need less staff as a result of the new machine This will require a payout of $100,000 in year 0 and save wages of $60,000 per year These amounts are tax deductible All cash flows are given in nominal terms The real rate of interest currently in the economy is 6 and inflation is 3 The corporate tax rate is 15 Assume tax is paid in the year of income The new machine will generate yearly revenue of $3m while the old machine was only able to generate annual revenue of $2m 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 5) Malcolm has to purchase additional inventory The cash flow impact of this in year 5 will be (1Mark) Answer $Answer AnswerInflowOutflow (Answer to the nearest Dollar) 6) The Cash Flow in period 0 is (2 Marks) Answer $Answer (Answer to the nearest Dollar, a negative sign may be used in the answer) 7) The appropriate discount rate to use in deciding whether Malcolm should buy the new machine is (1 Mark) Answer $Answer (Answer as a Decimal to 4 decimal places) 8) The Free Cash Flow in year 5 is (2 Marks) Answer $Answer (Answer to the nearest Dollar)

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Malcolm Jones owns the Persimmon Publishing Company and is in need of a new printing machine as technology is quickly changing. The best machines are

Malcolm Jones owns the Persimmon Publishing Company and is in need of a new printing machine as technology is quickly changing.
The best machines are available in both Germany and Denmark. Malcolm has taken advice from a former colleague and will purchase the RZ200 from Germany. Once the decision is made to purchase, he will need to travel to Germany to undertake training. This will cost $12,000 and is tax deductible in year 0.
The RZ200 will cost $400,000 and should be able to be sold for $50,000. The accountant has advised that the machine will be depreciated over 8 years. The ATO however requires depreciation over 6 years. It is expected that the machine will be kept for 5 years by Persimmon Publishing Company so any evaluation must be undertaken over a 5 year period. It will be sold after 5 years which is the projects life.
Malcolm will need to borrow 90% of the value of the RZ200 ($360,000) from the Eastern Bank. The loan will be at a fixed rate of 8% p.a. over 5 years, with interest only payable at the end of each year. The principal of $360,000 is repayable at the end of the fifth year.
The old machine was purchased two years ago and at that time was expected to have an economic life of 5 years. It cost $180,000 and Malcolm has been depreciating it using straight-line depreciation over five years as required by the ATO. Malcolm expects he will receive $70,000 if he sells the old machine. It is expected to be sold in period 0 if the new machine is purchased.
The RZ200 machine is state-of-the-art, and much more efficient than the old machine. The old machine costs $250,000 per annum to operate, whereas the RZ200 machine will only cost about $50,000 per annum to operate.
Due to the different manner in which the RZ200 operates, it will be necessary to purchase an additional $40,000 of inventory in year 0.
Malcolm will need less staff as a result of the new machine. This will require a payout of $100,000 in year 0 and save wages of $60,000 per year. These amounts are tax deductible.
All cash flows are given in nominal terms.
The real rate of interest currently in the economy is 6% and inflation is 3%.
The corporate tax rate is 15%. Assume tax is paid in the year of income.
The new machine will generate yearly revenue of $3m while the old machine was only able to generate annual revenue of $2m.
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.