Name:<\/p>\n
Instructor: <\/p>\n
Course:<\/p>\n
Date: <\/p>\n
1. NET INITIAL INVESTMENT FOR THE MACHINE<\/p>\n
Cost of New Machine $410,000<\/p>\n
Working Capital Investment $11,000<\/p>\n
Cash from Disposal of Old Machine $(21,000)<\/p>\n
Net Initial Investment $400,000<\/p>\n
2. <\/p>\n
Cost of New Machinery $580,000<\/p>\n
Training and Running New Machinery $16,000<\/p>\n
Cash from Disposal of Current Equipment $(42,000)<\/p>\n
Net Initial Investment $554,000<\/p>\n
3. Value of Investment (Interest on Investment) = 0.08 x 360,000 = $28,800<\/p>\n
Total Value = $28,800 + $360,000 = $388,800<\/p>\n
If not invested at 8% interest rate, the value of the money after one year would be<\/p>\n
Total Value = $360,000 + $0 = $360,000 since no interest would be earned, the value of the money would remain the same at $360,000<\/p>\n
4. NPV <\/p>\n
Source Cash flows PVIF12% PV<\/p>\n
Initial Investment 250,000 1 (250,000)<\/p>\n
Additional Initial costs 25,000 1 (25,000)<\/p>\n
Cash flow for Year1 50,000 0.893 44,643<\/p>\n
Cash flow for Year 2 75,000 0.797 59,790<\/p>\n
CF for Y3 75,000 0.712 53,384<\/p>\n
CF for Y4 75,000 0.636 47,664<\/p>\n
CF for Y5 75,000 0.567 42,557<\/p>\n
NPV -26,962<\/p>\n
Decision – Since the NPV < 0, the project should be rejected as its costs are more than the expected returns.<\/p>\n
5. Payback Period = Initial Investment\/Cash inflows = $291,000 \/ 80,000 = 3.6375<\/p>\n
Payback period = 3 years 7 months 20 days <\/p>\n
6.<\/p>\n
Year Cash flows ($) Cumulative CF ($)<\/p>\n
Year1 65, 0000 65,000<\/p>\n
Year2 65,000 130,000<\/p>\n
Year3 65,000 195,000<\/p>\n
Year4 65,000 260,000<\/p>\n
Year5 65,000 325,000<\/p>\n
Payback = 1 + 20,000\/65,000 = 1 year 3months 20days<\/p>\n
7.<\/p>\n
Payback period = 250,000\/130,000 = 1 year 11 months <\/p>\n
8. Machine 1<\/p>\n
Payback period = 389,100\/120,000 = 3 years, 3months<\/p>\n
Machine 2<\/p>\n
Payback period = 310,000\/120,000 = 2 years 7months <\/p>\n
Decision: Using the payback period investment criteria, Machine 2 would be recommended given that it has a shorter payback period that Machine 1, therefore reduces the risks associated with future cash flows. If the cutoff is 3 years, then payback period method ignores the cash flows after the third year and accepts a project with shorter payback period, Machine 2 in this case.<\/p>\n
9). Accrual accounting rate of return = NEBT\/ initial investment x 100%<\/p>\n
AARR = 34,400\/409,000 x 100% <\/p>\n
AARR = 8.41% <\/p>\n
10). AARR = 46,000\/285,000 x 100% <\/p>\n
AARR = 16.14%<\/p>\n
11. Increase in the Tax rate = $(122,000 – 80,000) = $42,000<\/p>\n
New Income = $(122,000 \u2013 100,000) = $22,000<\/p>\n
Change in Tax rate = 22,000 \/ 42,000 x 100% = 52.38% <\/p>\n
12. Total CF = $(34,000 + 5*24,000 \u2013 650,000)<\/p>\n
Total CF = -$496,00013. Loss on disposal of the old machine = Book value \u2013 Disposal Value <\/p>\n
=$43,500 – $8,200 = $35,300<\/p>\n
14. Tax Saving on Loss Disposal = $[14,250 + 50,000][0.42]<\/p>\n
Tax Saving on Loss Disposal = $26,98515. Increase in net income = Net income after depreciation and tax <\/p>\n
Net Income = (185,000 \u2013 111,000)(1 \u2013 0.4) = 74,000 x 0.6 <\/p>\n
Net Income = $44,40016. The CF= CF x tax rate <\/p>\n
CF = 150,000 [1-0.4] = $90,00017. Residual value = 195,000 \u2013 115,000 = $80,000 <\/p>\n
Cash flow from sales = $55,000 <\/p>\n
Net Cash Value from sales = $(55,000 \u2013 80,000) = -$25,000 (1-0.4) <\/p>\n
Net CF = – $10,000<\/p>\n
Therefore by disposing the asset, Hopewell Factory incurred a loss of $10,000.18. Total cash flow = 5 X 30,000 = $150,000<\/p>\n
CF after tax = CF(1-t) = 150,000(1-0.4) <\/p>\n
Cash flow after tax = $90,00019. Total cash flow = 5 X 25,000 = $125,000<\/p>\n
CF after tax = CF(1-t) = 125,000(1-0.25) <\/p>\n
Cash flow after tax = $93,75020. Nominal rate of return on the investment = rate of return \u2013 rate of inflation <\/p>\n
Nominal Rate of Return on the Investment = [18 \u2013 12]% = 6%<\/p>\n","protected":false},"excerpt":{"rendered":"
Name: Instructor: Course: Date: 1. NET INITIAL INVESTMENT FOR THE MACHINE Cost of New Machine $410,000 Working Capital Investment $11,000<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-42786","post","type-post","status-publish","format-standard","hentry"],"yoast_head":"\n