Answer this question using ONLY the table format as above. cash ouflow for year

Question

Answer this question using ONLY the table format as above. cash ouflow for year 5 equals 59500. calculate npv , answer a,b,c .

htTSREVIEW EXAMINATIONS 347 Question 6 (16 Marks) Graphic Limited provides you with the following data on which to evaluate a proposal submitted to replace an existing computer system. Existing $250,000 7 Years Proposal Initial purchase cost Expected life End of life scrap value When purchased Depreciation rate 20 % on Prime Cost Current trade-in value Positive before tax cash flows per year $350,000 5 Years $10,000$40,000 Two years ago New today $100,000 N/A $75,000 $105,000 Additional Information: (i) Company tax rate is 30% payable at the end of the income year. (ii) Cost ofcapital is 10% after tax. Required: (a) Calculate the Net Present Value of the existing system's future cash lows. (b) Calculate the Net Present Value of the proposal's future cash flows (c) Recommend whether or not to accept the proposal. Provide reasons.

Explanation / Answer

Requirement c:

Since NPV of the proposal is the highest, it is recommended to accept the proposal

Requirement a: Year 0 1 2 3 4 5 Inflows 75000 75000 75000 75000 75000 Tax 22500 22500 22500 22500 22500 Tax Shield on depreciation / Salvage Value after tax 15000 15000 15000 7000 Cashflow after tax 67500 67500 67500 52500 59500 PVF(10%) 0.909091 0.826446 0.751315 0.683013 0.620921 PV of Cash Flows 61363.64 55785.12 50713.75 35858.21 36944.82 240665.5 Requirement b: Year 0 1 2 3 4 5 Inflows 105000 105000 105000 105000 105000 Tax 31500 31500 31500 31500 31500 Tax Shield on depreciation / Salvage Value after tax 21000 21000 21000 21000 49000 Cashflow after tax -250000 94500 94500 94500 94500 122500 PVF(10%) 0.909091 0.826446 0.751315 0.683013 0.620921 PV of Cash Flows 85909.09 78099.17 70999.25 64544.77 76062.86 375615.1

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