Required Calculate the Net Present Value and Internal Rate of Return relative to

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Required

Calculate the Net Present Value and Internal Rate of Return relative to the purchase of a new widget making machine.

Machine cost $3,400,000

Useful life: 7 years

For tax purposes a 30 per cent reducing balance depreciation would be used.

Maintenance cost per annum: $75,000.

Maintenance technician salary per annum: $125,000

Operator’s salary: $90,000, plus 35 per cent on-costs.

Restructuring cost (First year only): $180,000.

Employee training costs are projected as follows:

First Year                    $35,000

Second Year               $25,000

Third Year                   $10,000

Increase in working capital required: $60,000.

Salvage value: $75,000.

Manufacturing cost savings per annum: $1,200,000.

Sale of now obsolete equipment over the next two years.

Company cost of capital: 10%

Tax rate: 30%.

Explanation / Answer

All Amounts in $ Cash Inflows per annum for three years Calculated on a per year basis Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Manufacturing Cost Savings 1200000 1200000 1200000 1200000 1200000 1200000 1200000 Less : Maintenance Costs 75000 75000 75000 75000 75000 75000 75000 Less : Maintenance Technician Salary 125000 125000 125000 125000 125000 125000 125000 Less : Operators' Salary 510000 510000 510000 510000 510000 510000 510000 Less : Employees' Training Costs 35000 25000 10000 10000 10000 10000 10000 Less : Depreciation 1020000 714000 499800 349860 244902 171431 120002 Income Before Taxes -565000 -249000 -19800 130140 235098 308569 359998 Less : Tax Impact @ 30% -169500 -74700 -5940 39042 70529.4 92570.6 107999 Income Post Taxes -734500 -323700 -25740 91098 164569 215998 251999 Add : Depreciation 1020000 714000 499800 349860 244902 171431 120002 Cash Inflows per year 285500 390300 474060 440958 409471 387429 372001 Based on the information given for the machine, the Net Present Value thereof is calculated as -$ 1,538,609.92

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