Problem Set Project Evaluation.docx - Class Exercises Topic...

Class Exercises
Topic 1: Cash Flow Estimation
Question 1
MultiAlpha is considering replacing an old machine with a new one. Two months ago their chief engineer
completed a training workshop on the new machine’s operation and efficiency. The cost of RM4000 cost
for this workshop session has already been paid. If the new machine is purchased, it would require
RM5000 in installation and modification costs to make it suitable for operation in the factory.
The old machine originally cost RM90000 five years ago and is being depreciated by RM15000 per year.
The new machine will cost RM80000 before installation and modification. It will be depreciated by
RM5000 per year. The old machine can be sold today for RM10000. The marginal tax rate for the firm is
28%.
Compute the relevant initial outlay in this capital budgeting decision.
Question 2
Cherry Flavour Company is considering the purchase of a packaging machine. The purchase price of the
machine is RM80,000, plus an additional RM1,500 to ship and RM25,000 to install. The new machine will
have a 5-year useful life and will be depreciated to zero using the straight-line method.
The machine is expected to generate new sales of RM40,000 per year and is expected to save RM15,000
per year in labour expenses over the next 5-years. However, the production costs will also go up by
RM3,000 every year. Upon buying the machine, it requires inventories to increase by RM20,000 and
accounts payable increase by RM10,000. The change in Net Operating Working Capital is expected to be
fully recovered at year 5. The machine is expected to have a disposal value of RM30,000. Cherry Flavour
Company uses an 8% discount rate for capital budgeting purposes and the firm's income tax rate is 40%.
a) Calculate the project initial outlay.
b) What is the NPV of the proposed project?
c) Should Cherry Flavour Company proceed with the project?
a)
Asset cost 80,000 CA= inventories- 20,000
CL= AP-10,000
+ Shipping 1,500
+ Installation 25,000
Total cost 106,500
+Change im NOWC 10,000
INTIAL OUTLAY = RM 116,500
b)
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
sales 40,000 40,000 40,000 40,000 40,000
+ Dec Labour 15,000 15,000 15,000 15,000 15,000
-Inc product 3,000 3,000 3,000 3,000 3,000
Inc Revenue 52,000 52,000 52,000 52,000 52,000
-net dep 21,300 21,300 21,300 21,300 21,300
Earn B4 Tax 30,700 30,700 30,700 30,700 30,700
-Tax payable 12,280 12,280 12,280 12,280 12,280
Earn after tax 18,420 18,420 18,420 18,420 18,420
+dep 21,300 21,300 21,300 21,300 21,300
Cash in flow 39,720 39,720 39,720 39,720 39,720
X PVIF 8%, n
0.9259 0.8573 0.7938 0.7350 0.6806

Dis.cash flow