New machinery plan of UCW

UCW Co is a listed company that plans to meet increased demand for its products by buying new machinery costing. $5 million. The machinery would last for four years, at the end of which it would be replaced. The scrap value of the machinery is expected to be 5% of the initial cost. The machinery is in CCA class 44 (25% deduction). The machinery will be sold at the book value at the end of the final year of operation. UCW applies the maximum deprecation based on the CCA class.

This investment will increase production capacity by 9,000 units per year, and all of these units are expected to be sold as they are produced. Relevant financial information in current price terms is as follows:

Forecast inflation.

Selling price $640 per unit 40% per year

Variable cost $250 per unit 55% per year

Incremental fixed costs $250,000 per year 50% per year

In addition to the initial cost of the new machinery, an initial investment in working capital of $500,000 will be required. Investment in working capital will be subject to the general rate of inflation, which is expected to be 47% per year.

UCW Co pays tax on profits at 20% per year, one year in arrears. The company has a nominal (money terms) after-tax cost of capital of 12% per year.

Required:

1. Calculate the net present value of the planned purchase of the new machinery using a nominal (money terms) approach and comment on its financial acceptability.

1. Identify TWO financial objectives of a listed company such as UCW Co and discuss how the planned investment in new machinery supports each of these financial objectives