Brookite Company (BC) wants to purchase a new machine costing $500,000 which will last 12 years to make Hoverboard - a new product. Because BC deals in products that are consumer oriented where tastes change rapidly, they assume a useful life for their products of 5 years. This machine could be sold for $200,000 at the end of Year 5 or for $50,000 at the end of 12 years.

• Brookite will have to increase its inventory and accounts receivable by $150,000 at the beginning of year 1 and by an additional $50,000 at the beginning of Year 2. They can recover only $150,000 of this working capital investment at the end of Year 5.
• Assume all of the following cash inflows occur at the end of the year.
• The new product revenues are expected to be as follows:

      Year 1         $400,000

      Year 2        $500,000

      Year 3         $700,000

      Year 4         $700,000

      Year 5         $300,000

• Cash outflows for the production of the Hoverboard will be 50% of revenues in Years 1, 2, and 3 and 60% of revenues in Years 4 and 5.
• BC will spend $100,000 on an advertising campaign in Year 1
• An additional $20,000 will be spent on advertising each year for years 2-5 (treat as an annuity)
• As part of the decision whether to make the Hoverboard, BC spent $100,000 on a preliminary market study last year.
• The machine will be in a CCA class where the rate is 20% . Taxes are 40% and Brookite requires 10% rate of return.

Should Brookite Company purchase this new machine? Include a calculation of the net present value, margin of safety and discounted payback .Also include qualitative points that should be considered and show all calculations

Answer rating: 100% (QA)

To determine whether Brookite Company should purchase the new machine we need to calculate the net present value NPV margin of safety and discounted payback First lets calculate the annual cash flows ... View the full answer