Global Wood Transport Co. (GWT) is considering investing on a new machinery aiming to improve the efficiency of its production process and the quality of its products. The marketing department claims that the higher quality of the product will allow the sale of each product unit at a higher price. This positive difference with the old price (the old price being 6e/unit) is estimated at 0,50€. Marketing department estimates an increase of sales, from 100,000 to 150,000 units for each year. The new investment will require 200,000e while the yearly operating and maintenance expenses are estimated at 10,000€. Selling, general and administrative expenses will not change compared to the old situation and they will be at the level of €5 per unit.

The new investment will require an extra working capital of 30.000€ in the beginning of the investment project and it will be recovered at the end of the useful life of the project, which is estimated at 8 years. The company uses the straight line to depreciate its assets. Tax rate is 22% while the cost of capital of GWT is 89c.

Using the above information, you are required to do the following:

1. Calculate the new investment’s cash flows throughout its eight-year useful life as well as its Net Present Value (NPV). Should the company invest on the new machinery? 
2. How you would change your answer in question (a) if the new machinery could be sold at the end of its useful life at 30,000€? Would its’ NPV be the same? Explain and demonstrate your calculations. 

Answer rating: 100% (QA)

Answer A The cash flows of the investment are as follows Year 0 200000 Year 1 10000 15000005 5150000 ... View the full answer