Fred corporation eshmates at it can sqve e sts For e next 4 years if t buys a sp

Question

Fred corporation eshmates at it can sqve e sts For e next 4 years if t buys a special- purpose machinc at a cost of 33600 a year in cashopeating te d He vn w machine. Ale umc overall income tax rate of as%, and a rn ,n,mum des,ved rale .f ieturn of 16% after tore, . Neus machine fiti int° the mACR' -yeaty class Annual depauiah on Pecentages por the 3-year mac. pnputy class a-e 33.32% , 44.95%,14.% andt.nz. eldmachane, which book valac $15,000, was cold 40 a scrap dealer to-soo , sin he ins fall ation of neua machime qwired a chutdown of operatione, nurn to levels uce inceare-f by 4'200 aver sales, n's in mvenhory wl be veleased in he net yeartsume oall company Pepake a Net pes ent Value Analys's P, prect abve. shaw-umnn aver sales his and diceunted cash flows andtompate nct pesent value. would y ou not and why Include mAces Depuation schedule Describe three sensitivities you might run on the NPV anauj st Relative to straight-line de peaa tion, how does mARce de preaaton help or hurt discrunted cash flo w analy ses?

Explanation / Answer

1 1 Initial Cash Outflow Amount Cost of New Machine 1,00,000 (-) Sale of old machine -5000 95,000 2 Subsequent Cash Inflows Particulars Year 1 Year 2 Year 3 Year 4 Annual Savings 33,000 33,000 33,000 33,000 (-) Depreciation ( MACRS) -33330 -44450 -14810 -7410 Savings before tax -330 -11,450 18,190 25,590 (-)Tax @ 35% 0 0 6366.5 8956.5 Profit after Tax -330 -11,450 11,824 16,634 (+) Depreciation 33000 44450 14810 7410 Annual Cash Savings 32,670 33,000 26,634 24,044 Discounting factor @ 16% 0.86 0.74 0.64 0.55 Discounted cash flows 28163.79 24524.38 17062.96 13279.01 Total Cash InFlows 83030.14 NPV Cash Inflow - Cash Outflow -11,970 The project would be declined as the NPV is negative. 2 The 3 sensitivites that could possible be run on the project could be:- a. Estimation of annual savings b. Depreciation method c. Change in desired rate of return 3 1 Initial Cash Outflow Amount Cost of New Machine 1,00,000 (-) Sale of old machine -5000 95,000 2 Subsequent Cash Inflows Particulars Year 1 Year 2 Year 3 Year 4 Annual Savings 33,000 33,000 33,000 33,000 (-) Depreciation ( SLM) -25000 -25000 -25000 -25000 Savings before tax 8,000 8,000 8,000 8,000 (-)Tax @ 35% 2800 2800 2800 2800 Profit after Tax 5,200 5,200 5,200 5,200 (+) Depreciation 25000 25000 25000 25000 Annual Cash Savings 30,200 30,200 30,200 30,200 Discounting factor @ 16% 0.86 0.74 0.64 0.55 Discounted cash flows 26034.48 22443.52 19347.86 16679.19 Total Cash InFlows 84505.06 NPV Cash Inflow - Cash Outflow -10,495 The project would be declined as the NPV is negative. Even with SLM, the NPV is negative and will not be accepted.

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