Wild west inc. must determine whether it should purchase a new machine costing 1
ID: 2719187 • Letter: W
Question
Wild west inc. must determine whether it should purchase a new machine costing 1500000. WW will also spend 150,000 to install and do the intial testing on the machine.
-The machine has a useful life of 15 years and will be depreciated uniformly (straight line) over its useful life.
-IF the new machine is purchased an old machine costing 500000 with a book value of 250000 will be sold for 200000.
- The new machine will require a working capital investement of 100000 that will be released at the end of the project.
-The machine is expected to generate annual cash savings of 150,000.
-At the end of the new machines useful life, it will be sold for 75000.
-Wild west cost of capital is 10% and its tax rate is 20%.
1.Calculate the net present value of all cash flows to determine whether or not the machine should be purchased.
Explanation / Answer
Cost of New Machine:=Cost of Purchase + Installation Charges-Sale price of Existing asset sold =1,500,000+150,000-200,000=1,450,000
Depreciation Per Annum=(Cost of asset-Salvage Value)/Life of asset
=(1,450,000-75,000)/15
=1,375,000/15 =91,666
Computation of Total cash outflow:
Year
Working Capital
Discount factor @ 10%
PV value
Depreciation exp after tax Saving
Total cash out flow
1
100,000
0.909
90,909.09
66,666.18
157,575.27
2
100,000
0.826
82,644.63
60,605.62
143,250.25
3
100,000
0.751
75,131.48
55,096.02
130,227.50
4
100,000
0.683
68,301.35
50,087.29
118,388.63
5
100,000
0.621
62,092.13
45,533.90
107,626.03
6
100,000
0.564
56,447.39
41,394.45
97,841.85
7
100,000
0.513
51,315.81
37,631.32
88,947.13
8
100,000
0.467
46,650.74
34,210.29
80,861.03
9
100,000
0.424
42,409.76
31,100.27
73,510.03
10
100,000
0.386
38,554.33
28,272.97
66,827.30
11
100,000
0.350
35,049.39
25,702.70
60,752.09
12
100,000
0.319
31,863.08
23,366.09
55,229.17
13
100,000
0.290
28,966.44
21,241.90
50,208.34
14
100,000
0.263
26,333.13
19,310.82
45,643.94
15
100,000
0.239
23,939.20
17,555.29
41,494.49
Total PV of Cash Ouflow ( working Capital+ Depreciation)
760,607.95
557775.1072
1,318,383.06
Computation of Net cash inflow:
Year
Cash Flow
Discount factor @ 10%
Present Value
Total cash out flow
PV of Net Cash Flow
1
150,000
0.909
136,363.64
157,575.27
(21,211.64)
2
150,000
0.826
123,966.94
143,250.25
(19,283.31)
3
150,000
0.751
112,697.22
130,227.50
(17,530.28)
4
150,000
0.683
102,452.02
118,388.63
(15,936.62)
5
150,000
0.621
93,138.20
107,626.03
(14,487.83)
6
150,000
0.564
84,671.09
97,841.85
(13,170.76)
7
150,000
0.513
76,973.72
88,947.13
(11,973.42)
8
150,000
0.467
69,976.11
80,861.03
(10,884.92)
9
150,000
0.424
63,614.64
73,510.03
(9,895.38)
10
150,000
0.386
57,831.49
66,827.30
(8,995.80)
11
150,000
0.350
52,574.08
60,752.09
(8,178.00)
12
150,000
0.319
47,794.62
55,229.17
(7,434.55)
13
150,000
0.290
43,449.66
50,208.34
(6,758.68)
14
150,000
0.263
39,499.69
45,643.94
(6,144.26)
15
150,000
0.239
35,908.81
41,494.49
(5,585.69)
15(Salvage value)
75,000
0.239
17,954.40
17,954.40
Total of Net PV of Cash inflows
1,158,866.33
1,318,383.06
(159,516.73)
As it is generating Negative Cash flow hence Purchasing Machine is not advisable
Year
Working Capital
Discount factor @ 10%
PV value
Depreciation exp after tax Saving
Total cash out flow
1
100,000
0.909
90,909.09
66,666.18
157,575.27
2
100,000
0.826
82,644.63
60,605.62
143,250.25
3
100,000
0.751
75,131.48
55,096.02
130,227.50
4
100,000
0.683
68,301.35
50,087.29
118,388.63
5
100,000
0.621
62,092.13
45,533.90
107,626.03
6
100,000
0.564
56,447.39
41,394.45
97,841.85
7
100,000
0.513
51,315.81
37,631.32
88,947.13
8
100,000
0.467
46,650.74
34,210.29
80,861.03
9
100,000
0.424
42,409.76
31,100.27
73,510.03
10
100,000
0.386
38,554.33
28,272.97
66,827.30
11
100,000
0.350
35,049.39
25,702.70
60,752.09
12
100,000
0.319
31,863.08
23,366.09
55,229.17
13
100,000
0.290
28,966.44
21,241.90
50,208.34
14
100,000
0.263
26,333.13
19,310.82
45,643.94
15
100,000
0.239
23,939.20
17,555.29
41,494.49
Total PV of Cash Ouflow ( working Capital+ Depreciation)
760,607.95
557775.1072
1,318,383.06
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