Question 4

Bush Stone-Curlew Ltd. is a company that makes upmarket timber-based products in Brisbane. It is considering replacing 5 employees with a new machine that costs $350,000. The machine will be depreciated using the prime cost method over five years and have a terminal book value of $5,000. The market value of the machine will be $50,000 in five years. Each of those employees is currently paid an annual salary of $20,000. If bought, the machine will immediately reduce the companys net working capital by $35,000, but this amount of net working capital will have to be fully replaced once the machine is sold. The companys cost of capital is 15%. Bush Stone-Curlew Ltd. is subject to a corporate tax rate of 35%.

Answer the following questions:

[Total marks: 7 + 6 + 5 + 2 = 20 marks]

1. Calculate NOPAT (Net Operating Profit After Tax). [7 marks]
2. Calculate NCF (Net Cash Flows). [6 marks]
3. Calculate NPV (Net Present Value). [5 marks]
4. Should Bush Stone-Curlew Ltd. buy the machine? [2 marks]

Instructions:

• Round your final answers to 2 decimal places.
• Use Table 1. Accounting Flows on the next page to calculate NOPAT.
• Use Table 2. Cash Flows on the next page to calculate NCF.
• Parts c) and d) can be done right at the bottom of Table 2. Cash Flows.