Question

QUESTION 3 10 marks You are considering the purchase of a new automated CNC machining centre for your company's manufacturing division. The required capital is $3,300,000. The planned life of this machine is estimated at 1 years, after which the salvage value will be $450,000. You have calculated that this machining centre will enable the machining of precision components 24 hours per day (thus increasing gross revenue by $650,000 annually) and more efficiently (by reducing annual labor costs by $180,000). The prime-lending rate is currently 7.5%. Inflation is running at 1.0 % . aksan Figure 3: Typical Computer Numerically Controlled (CNC) machining centre Your tasks Calculate the discounted payback period for this proposal, taking account of the 'time-value of money. All financial estimates are in Australian dollars 3.1 8 marks 3.2a Explain why the caleulation does not depend on whether your company uses its own liquid assets to fund the project, or raises the capital by borrowing. 3.2b Recommend whether, in your opinion, the new automated CNC machining centre development should proceed. mark 3.2c State any assumptions you have made or additional information you require in order to answer this question more fully (i.e. if you were working as a professional consulting engineer preparing a briefing paper) I mark Definitions that may assist p.w.f. "present worth factor" P S (1+r c.r.f."capital recovery factor" cRrx(1+r) P (1+r)-1 r real interest rate n number of years A"annual cost equivalent" (present worth terms) (-pV) x c I installed cost (present worth terms) V salvage value (a future amount) P is the present value of S, n years in the future R annual return of project (present worth terms) Total Project Cost (present worth terms), T nxA DPBP-"discounted payback period" =T/R ( years)

Answer 1

PAGE NO DATE 3.1 Cash Tulous Sauing is cost t Tuicdarel gross 80,000t 6,5ocoo 8,30,000 Reveuuc Cost of Capstal auet 3300000 PaV factor 8-57 7.51.t11 PU Aut 764430 Hear 1 764430 830 c00 0.921 14 69930 O.950 2 3 8.30,000 2 118940 2317420 3 269 r0 649060 O382 8.30.000 598430 551450 507960 0.724 8-30.000 &.30,000 0.665 3777330 830 000 0.612 bach Poried= 5+ 30,630 567960 5.660 4ca Hore, 3063 33.0000-32693t0 S09460 377330-3259370 Cisis

3.2 A

the PVF (present value Factor) is the computing measure to calculate discounted cashflows . hence the source of funding is not so relevant.

3.2 B

yes the deal is good for the company as the cashflow after payback period are the real profit along with salvage value.

3.2 c

the rate of tax would have helped to find the benefits out of the depreciated charged

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