Question 3 (15 Marks) The management of Bewdy Limited are wondering whether or n

Question

Question 3 (15 Marks) The management of Bewdy Limited are wondering whether or not to replace their existing machine. You are asked to evaluate and provide a recommendation to the board. Data: Details of Current Machine. • The current machine (when installed had an effective life of eight years) has been operating for three years. • The original cost was $8,000,000. • It was estimated that the machine would have no value at the end of the eight years. · Depreciation is calculated on the straight line basis. • It is estimated that the machine has a current value of $3,000,000. • The machine could not continue without immediate repairs of $500,000.

Explanation / Answer

Requirement b:

NPV of cash flows for keeping the current machine = $637240

NPV of cash flows for installing the new machine = - $830160

Since NPV for keeping the current machine is greater than that of installing the new machine, the option to be chosen is (i) i.e., keeping the current machine.

Requirement (a)(i): Calculation of Net Present Value of the cash flows keeping the current machine: Year 0 Years 1 to 5 Repairs -500000 Depreciation ((8000000 / 8)) 1000000 Tax Shield on depreciation ((1000000 * 30%)) 300000 PVF (10%) 1 3.7908 PV of Cash Flows -500000 1137240 Net present Value 637240 Requirement (a)(ii): Calculation of Net Present Value of the cash flows for installing the new machine: Year 0 Years 1 to 5 Year 5 Cost of new machine -10000000 Less: Realisation from sale of current machine 3000000 Net Investment -7000000 Savings 1100000 Increase in energy costs -100000 Depreciation(10000000 * 20%) -2000000 Net Earnings -1000000 Taxes (1000000*30%) 300000 Earnings after tax -700000 Depreciation 2000000 Cash Flow after tax 1300000 Residual Value 2000000 PVF (10%) 1 3.7908 0.6209 PV of Cash Flows -7000000 4928040 1241800 Net Present Value -830160

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.