performance management question

Question 3: Capital budgeting (20 marks) With the vision to expand market to New South Wales in near future, the headquarter of OV wants to increase SW's capacity to at least double the current level. There are two proposals coming from the factory manager. (1) Keep the old machine, and purchase another machine of the same type, which has the same capacity as the old machine, 150,000 kg per year. (2) Sell the old machine and purchase a new advanced machine, which has the capacity to produce 600,000kg per year. To purchase this advanced machine, which will cost $2 million, QV will need to spend $1.5 million out of their own fund, and the remainder will be funded by a 10-year external loan of $500,000 at 6% per year. Interest is to be paid yearly and principle to be paid off at the end of the loan term. The manager, which has some accounting knowledge, has estimated the cashflows associated with two options in the below table. The increases in sale are estimated based on the additional production output under each option, and at current selling price. The increases in variable costs are based on the additional production output and standard variable cost per unit. Forecasted cashflows Option 1 Option 2 Cost of new machine 500,000 2,000,000 Sales of old machine netbook value of $150,000 100,000 Annual increase in sales 2,500,000 4,250,000 Annual increase in variable costs 1,630,000 2,716,667 Interest expense yearly 30,000 Paid off principle at the end of year 10 500,000 Expected sales of machines at the end of usefu S 10,000 50,000 Tax rate 30% 30% Weighted average cost of capital 6% Depreciation method straight-line straight-line Useful life (years) Requirement 1: Make recommendation to the manager as to which option to be selected by undertaking the following: (a) Calculating after tax NPV for both options (12 marks) (b) Identify and explain other possible cashflows that might not be considered by the manager (2 marks) Requirement 2: Assess the accuracy of the NPV for both projects in light of the current COVID-19 situation (5 marks) NOTE: 1 mark is for professional formatting of the NPV tables Question 1 - Variance analysis Question 2-Cash budget Question 3 - Capital budgeting Ques ... +