The Soho Ale Company has an old brewing machine with a net disposal value of £12,000 now and £4,000 five years from now. A new brewing machine is offered for £57,000 cash or £45,000 with a trade-in. The new machine will result in an annual operating cash outflow of £40,000 as compared with the old machine’s annual outflow of £50,000. The disposal value of the new machine 5 years hence will be £2,000.
The required rate of return is 20%. The company uses DCF techniques to guide these decisions. Should Soho Ale acquire the new brewing machine? Show your calculations. Company procedures require the computing of the PV of each alternative. The most desirable alternative is the one with the least cost. Assume that the PV of £1 at 20% for 5 years is £.40; the PV of an annuity of £1 at 20% for 5 years is £3.

  • CreatedNovember 19, 2014
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