Engineering Company Pty. Ltd. is considering a proposal to purchase an additional spray machine for its repair
Question:
Engineering Company Pty. Ltd. is considering a proposal to purchase an additional spray machine for its repair shop. The finance officer of the company has gathered the following data/ information relevant to the machine. Purchase and Installation cost of the machine $ 120,000 Useful life of the machine 5 Years Estimated salvage value at the end of 5 years $ 5,000 Net cash inflow that will be generated by the machine from end of year 1 to the end of year 5, before deducting depreciation and income tax, is estimated at $ 40,000 per year. Although the machine will have a useful life of 5 years, the Tax Department will allow the company to fully depreciate the machine in 4 years. To take advantage of this tax rule, the company will depreciate the machine in full over the first 4 years, ignoring the estimated salvage value. The new spray machine will require an incremental investment in working capital of $10,000.This will be fully recovered at the end of the machine's working life. The applicable tax rate for the Engineering Company is 30% and the after-tax required rate of return (cost of capital) is 10%.
You are required to:i) Calculate the NPVii) Make a recommendation based on the NPV
Managerial Accounting An Introduction to Concepts Methods and Uses
ISBN: 978-0324639766
10th Edition
Authors: Michael W. Maher, Clyde P. Stickney, Roman L. Weil