The management of Spring Ltd are making a decision on whether or not to purchase a new
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The management of Spring Ltd are making a decision on whether or not to purchase a new piece of plant and machinery which costs $\$ 100,000$. The new machine will generate a net cash flow of $\$ 30,000$ each year for four years. At the end of the fourth year it will be sold for $\$ 20,000$. The company's cost of capital is $5 \%$. Tax depreciation is at $25 \%$ reducing balance and corporation tax is $30 \%$. Corporation tax is payable in two instalments, with half paid in the current year and half paid in the following year.
Required:
Calculate the net present value of the project and advise management.
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