Volgunde Co plans to buy a new machine. The cost of the machine, payable immediately, is 800,000 and the machine has an expected life of five years. Additional investment in working capital of 90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced.

Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for 16 per unit and will incur variable costs of 11 per unit. Incremental fixed costs arising from the operation of the machine will be 160,000 per year.

Volgunde Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Tax allowable depreciation and inflation should be ignored.

For PV and NPV calculation you must use discount factors from table provided (no Excel fx formulas needed to use for calculations this time)!

Discount factors to be used for PV calculations:

	Y0	Y1	Y2	Y3	Y4	Y5	Y6
Discount factors (From PV table, 11%, 6 years)	1.000	0.901	0.812	0.731	0.659	0.593	0.535

You are required:

Calculate the NPV of investing in the new machine!

To calculate NPV you need to start with your own spreadsheet! You need to define all cash

outflows and inflows during project life.

You need to calculate Volgunde Co net cash flow for Y0 to Y6! Correct result is very important for further calculations and final result - NPV!

1. The total net cash flow for Year 0 is:

a. 890,000

b. (-890,000 )

c. 800,000

d. 0

e. 1,600,000

f. (-1,600,000 )

g. 1,100,000

h. 340,000

2. The total net cash flow for Year 1 is:

a. 340,000

b. (-340,000 )

c. 250,000

d. 500,000

e. (-500,000 )

f. 1,600,000

g. 1,100,000

h. 0

3. The total net cash flow for Year 2 is:

a. 800,000

b. (-800,000 )

c. 238,000

d. (-238,000 )

e. 340,000

f. (-340,000 )

g. 102,000

h. 306,300

4. The total net cash flow for Year 3 is:

a. 800,000

b. 1,800,000

c. (-800,000 )

d. 238,000

e. 340,000

f. 102,000

g. (-102,000 )

h. 218,220

5. The total net cash flow for Year 4 is:

a. 800,000

b. (-800,000 )

c. 340,000

d. (-340,000 )

e. 440,000

f. 304,562

g. 0

h. All given results are wrong

6. The total net cash flow for Year 6 is:

a. 160,000

b. 102,000

c. (-102,000 )

d. 368,000

e. (-368,000 )

f. 0

g. 90,000

h. 28,000

7. Present value of cash inflows for year 1 to year 6 is:

a. 994,070

b. 1,320,000

c. 1,422,000

d. 1,794,070

e. 1,104,070

f. (-1,794,070 )

g. (-800,000 )

h. 1,000,070

8. Present value for cash inflow for year 5 is:

a. 90,000

b. 218,224

c. 193,256

d. 318,204

e. 98,224

9. Present value for cash inflow for year 6 is:

a. 90,000

b. 102,000

c. (-102,000 )

d. 54,570

e. (-54,570 )

f. 0

g. 368,000

h. 238,000

10. The Net Present Value of the project cash flows is:

a. 90,000

b. 890,000

c. (-890,000 )

d. 104,070

e. 1,422,000