AAAA is a company that makes upmarket timber-based products in country B. It is considering replacing 5
Question:
AAAA is a company that makes upmarket timber-based products in country B. It is considering replacing 5 employees with a new machine that costs $350,000. The machine will be depreciated using the prime cost method over five years and have a terminal book value of $5,000. The market value of the machine will be $50,000 in five years. Each of those employees is currently paid an annual salary of $20,000. If bought, the machine will immediately reduce the company's net working capital by $35,000, but this amount of net working capital will have to be fully replaced once the machine is sold. The company's cost of capital is 15%. AAAA is subject to a corporate tax rate of 35%.
Answer the following questions:
a. Calculate NOPAT (Net Operating Profit After Tax).
b. Calculate NCF (Net Cash Flows).
c. Calculate NPV (Net Present Value).
d. Should AAAA Ltd. buy the machine?