Question

Question Last year, Bryce Canola Ol Company paid a consultant $12,000 to conduct an analysis on how to improve its operations. One outcome of this resulted in a recommendation by the consultant to consider the replacement of its operating equipment The company now plans to replace its old harvester machine with a new one, to speed up its production process. The machine will cost the company $1 million, Inclusive of delivery and set-up charges. The machine can be depreciated on a straight-line basis over five years. This capital expenditure qualifies for the recently announced 4% investment allowance for agribusiness, by the Federal Government. of the company proceeds with the replacement, the old harvester machine will be sold today, for $180,000. It hasn't been fully deprecated, and currently has a book value of $200.000, The new harvester will speed up production in the canola folde by 50%, and the company expects revenues to increase from $1.2 million per year to $2,1 million per year. However, expanded production will noroese operating costs by $440,000 each year. The new harvester will have to be insured at an additional cost of $25.000 per year, where insurance premiums are paid at the start of each year, At the end of five years, the company expects to sell the new harvester for a salvage value of $290,000 The company wil incur a new bank loan to fund this purchase and the lender has indicated an interest rate of 75% pa. The company's tax rate in 30%. The firm typically applies an after tax required rate of return based on its WACC for routine equipment replacement proposals. This rate will be opa, considering the impact of the new bank loan. The company also typically prefers projects that take less than 2 years to recover the initial investment. Tasks • Bet up a table of incremental cash flows over the useful life of this machine 15 mars Calculate the Net Present Value (NPV), Internal Rate of Return (IRR), the Profitability Index Po and the Payback period for this investment proposal 12 mars

Answer 1

PROJECT = NEW MACHINE YEAR O YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 TERMINAL (1,000,000) 290,000 cost of new machine salvage value book value of old machine sale value of old machine profit on sale of old machine 200,000 180,000 20,000 900,000 (440,000) (25,000 900,000 (440,000) (25,000) 900,000 (440,000 (25,000) 900,000 (440,000) (25,000) (25,000) incremental revenue additional cost insurance cost investment allowence EBIDT depreciation EBT tax@30% net income (5,000 900,000 (440,000) (25,000) (40,000) 395,000 (200,000) 195,000 58,500 136,500 (5,000) (1,500 (3,500) 435,000 (200,000) 235,000 70,500 164,500 435,000 (200,000) 235,000 70,500 164,500 435,000 (200,000) 235,000 70,500 164,500 460,000 (200,000) 260,000 78,000 182,000 290,000 87,000 203,000 203,000 1,231,500 cash flow(net income + depreciation + investment allowance) cumulative cash flows discounting factor discounted cash flows cumulative discounted cash flows payback period discounted payback period (823,500) (823,500) 1 (823,500) (823,500) 376,500 (447,000) 1 345,413 (478,087) 12 12 364,500 (82,500) 1 306,792 (171,295) 12 12 364,500 282,000 1 281,461 110,166 364,500 646,500 1 258,221 368,387 382,000 1,028,500 1 248,274 616,661 121,042 737,703 3

NPV IRR MIRR PI payback period in no of years discounted payback period in no of years 737,703 37% 21% 90% 2.2% 2.6% discounting factor 9%