MMA is a small cleaning company, employing cleaners at a cost to the company of 12,000 per cleaner per annum. The manager notices that the Splash automated squeegee is now available in the market at 27900. This machine allows one worker to do the work of two but has associated annual running costs of 3000. (a) Assume for simplicity that no taxes or other cash-flows, e.g. redundancy payments, follow from a decision to acquire the machine. What is the payback period for acquiring the machine? (20 marks) (b) Assume that capital allowance (on a reducing balance scheme) is at 20% p.a. and corporation tax is 25%. It is also assumed that tax payment is made at the end of each year. If the company's cost of funds is 10% per annum, how long must the machine survive in order to give a positive NPV? Show the working out in a table or multiple tables. (30 marks) (c) The machine's manufacturer offers the following deal additionally. For an annual service payment of 3000 (additional to the 3000 running costs), the manufacturers will maintain the machine in running order and will buy it back for half price at the end of 5 years. On an NPV basis, with a discount rate of 10%, would you advise MMA to take up this deal? Present your working out in a table or multiple tables. (30 marks) (d) Explain concisely how financing costs are dealt with in the evaluation of parts (b) and (c). MMA is a small cleaning company, employing cleaners at a cost to the company of 12,000 per cleaner per annum. The manager notices that the Splash automated squeegee is now available in the market at 27900. This machine allows one worker to do the work of two but has associated annual running costs of 3000. (a) Assume for simplicity that no taxes or other cash-flows, e.g. redundancy payments, follow from a decision to acquire the machine. What is the payback period for acquiring the machine? (20 marks) (b) Assume that capital allowance (on a reducing balance scheme) is at 20% p.a. and corporation tax is 25%. It is also assumed that tax payment is made at the end of each year. If the company's cost of funds is 10% per annum, how long must the machine survive in order to give a positive NPV? Show the working out in a table or multiple tables. (30 marks) (c) The machine's manufacturer offers the following deal additionally. For an annual service payment of 3000 (additional to the 3000 running costs), the manufacturers will maintain the machine in running order and will buy it back for half price at the end of 5 years. On an NPV basis, with a discount rate of 10%, would you advise MMA to take up this deal? Present your working out in a table or multiple tables. (30 marks) (d) Explain concisely how financing costs are dealt with in the evaluation of parts (b) and (c)
