Hello. I think I am alright with this but have gone wrong in a few places. Pleas

Question

Hello. I think I am alright with this but have gone wrong in a few places. Please provide any workings, explanations and calculations.

George is currently considering the replacement of an old grinder in his workshop. The old grinder was purchased 3 years ago for $40,000. It is being depreciated using the prime (straight line) depreciation method. Its life is 5 years with no salvage value at the end of the 5th year. A trader has offered George $25,000 for the old grinder The new grinder which George would like to purchase costs $70,000. The installation cost is $5,000. This grinder would also be depreciated over 5 years using the prime method. However, at the end of the 5th year, its expected sales value is $5,000. The new grinder requires an increase of $7,550 in net working capital. Tax rate is 30%. Annual revenue and expenses before depreciation, interest and tax are estimated below: PERIOD NEW GRINDER OLD GRINDER Revenue 500,000 500,000 500,000 500,000 500,000 Revenue Year 550,000 Year 2 575,000 Year 3 600,000 Year 4 625,000 Year 5 625,000 490,000 505,000 525,000 545,000 545,000 445,000 445,000 445,000 445,000 445,000 1) 2) Calculate the initial investment associated with the new grinder Calculate the relevant (incremental) operating net cash flows. Explain why interest should not be included as a project cost. Calculate the terminal cash flows. Prepare a table with all the incremental cash flows of the project. Calculate the net present values of the incremental cash flows using costs of capital of 8.00%. 12.00%, 16.00% and 20.00 %. Comment on the change in the NPV when the cost of capital changes. Calculate the internal rate of return. If the cost of capital changes, will the internal rate of return change accordingly? At which cost of capital (analyse the four situations given in part 5) will the project be accepted? 3) 4) 5) 6) 7)

Explanation / Answer

Dear Student, we as an expert are allowed to do only 4 subparts of any question

1 The initial investment associated with the new grinder Purchase Cost $70,000 Installation Cost $5,000 Working Capital requirement $7,550 Disposal value after after $3,500 Initial Investment $86,050 2 Operating Net cash flows New Grinder Old Grinder Period Revenue Expense Net CashFlow Revenue Expense Net CashFlow Year 1 550000 490000 60000 500000 445000 55000 Year 2 575000 505000 70000 500000 445000 55000 Year 3 600000 525000 75000 500000 445000 55000 Year 4 625000 545000 80000 500000 445000 55000 Year 5 625000 545000 80000 500000 445000 55000 Incremental Cash Flow from New Grinder Period Incremental Cash Flow Year 0 -50000 (75000-25000) Cost of new grinder-sale price of old grinder) Year 1 5000 (60000-55000) Year 2 15000 (70000-55000) Year 3 20000 (75000-55000) Year 4 25000 (80000-55000) Year 5 25000 (80000-55000) 3 Terminal Cashflow Terminal Cashflow = After tax cash inflow from disposal of asset + recoupment of working capital                                        =$3500+$7550                                        =$11050 4 NPV of incremental cash flows Incremental Cash Flow Cost of Capital 8% PV @ 8% Cost of Capital 12% PV @ 12% Cost of Capital 16% PV @ 16% Cost of Capital 20% PV @ 20% Year 0 -50,000.00 1.00 -50,000.00 1.00 -50,000.00 1.00 -50,000.00 1.00 -50,000.00 Year 1 5,000.00 0.926 4,629.65 0.893 4,464.30 0.862 4,310.00 0.833 4,165.00 Year 2 15,000.00 0.857 12,860.10 0.797 11,957.85 0.743 11,145.00 0.694 10,410.00 Year 3 20,000.00 0.794 15,876.60 0.712 14,235.60 0.641 12,820.00 0.579 11,580.00 Year 4 25,000.00 0.735 18,375.75 0.636 15,888.00 0.552 13,800.00 0.482 12,050.00 Year 5 25,000.00 0.681 17,014.50 0.567 14,185.75 0.476 11,900.00 0.402 10,050.00 Total 18,756.60 10,731.50 3,975.00 -1,745.00

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