Questions:

1. Prepare a timeline presenting the cash flows relevant to this proposal.
2. Determine the following on a pre-tax cash basis: payback period, net present value, profitability index (aka Benefit/Cost ratio using PV cash flows).
3. Repeat steps 1 and 2 with after-tax cash flows. Explain why and how your answers are now different?
4. What qualitative factors would you ask the company before recommending whether to purchase the asset or not?
5. What other information would you want in order to make a more valuable recommendation to the company?
6. Create an Income Statement in the Variable Costing format showing the net income or loss attributed to this operating this machine.
7. Would you recommend that the company purchase this asset? Why or why not?

Pluskwik Manufacturing is considering purchasing a new production machine. The equipment will cost $320,000 and have a 5-year useful life. Expected salvage value is $20,000. Tax regulations permit the following depreciation schedule: Year Depreciation -- Percent of Cost Deduction - similar to the IRS MACRS method 1 20% 2 3 32 19 15 14 4 5 The company's tax rate is 20% and its discount rate is 4%. The equipment is expected to generate the following cash savings and cash expenses: Year Cash Savings Variable Expenses Fixed Expenses (not including depr) 1 $112,000 $10,000 $1,000 each year of the assets life N $114,000 $7,000 3 $114,000 $7,000 4 $120,000 $8,000 5 $120,000 $8,000 Pluskwik Manufacturing is considering purchasing a new production machine. The equipment will cost $320,000 and have a 5-year useful life. Expected salvage value is $20,000. Tax regulations permit the following depreciation schedule: Year Depreciation -- Percent of Cost Deduction - similar to the IRS MACRS method 1 20% 2 3 32 19 15 14 4 5 The company's tax rate is 20% and its discount rate is 4%. The equipment is expected to generate the following cash savings and cash expenses: Year Cash Savings Variable Expenses Fixed Expenses (not including depr) 1 $112,000 $10,000 $1,000 each year of the assets life N $114,000 $7,000 3 $114,000 $7,000 4 $120,000 $8,000 5 $120,000 $8,000