Magic Timber and Steel (Magic) has two options:

Keep the old machine, the Matrix 750, by spending money upfront to service and improve its

Buy the new and improved machine, the Delta

The proposed investment question asks, "Should Magic buy the new machine?" Thus, only one NPV calculation is required, which will include the net of the cash flows of the two options. If the NPV is a positive number, Magic should purchase the new Delta. If the NPV is a negative number, Magic should keep the Matrix.

Your team performed NPV calculation and the following table is the result. Table is available in the Case AssignmentPreview the document.

Your team also performed the following sensitivity analysis

Change the discount rate to 12 per

Change the Year 5 selling price of the Delta to $80,000.

Change the maintenance costs for the Delta: Year 1 costs are $1,000, increasing by $1,000 each

Change all of the above factors

Before you make a final report to Mr. Davidson, you try to think of other factors that have not been considered in the NPV analysis that might have an impact on the decision (quantitative and/or qualitative). You identify these factors as bullet points in your final report, along with a few sentences to explain their relevance.

Your final report must explain the NPV analysis and the Sensitivity analysis from your team report above, add other factors with explanation and finally make recommendation whether or not to purchase the Delta with detail reasons; the reasons must be explained thoroughly.

Calculation of Tax

Repair costs saved (old) 28,000 year 0

Maintenance saved (old) 7,000 7,000 7,000 7,000 7,000 years 1-5

Major service saved (old) 4,000 year 3

Labour saving (new) 5,250 5,500 5,750 6,000 6,250 years 1-5

Electricity saving (new) 4,725 4,800 4,875 4,950 5,025 Years 1-5

Maintenance (new) -2,000 -3,000 -4,000 -5,000 -6,000 years 1-5

Depreciation foregone (old) 6,000 6,000 6,000 6,000 6,000 years 1-5

Depreciation (new) -14,000 -14,000 -14,000 -14,000 -14,000 years 1-5

Profit/loss on sale (new)* -10,000 year 5

Taxable income 28,000 6,975 6,300 9,625 4,950 -5,725 Years 0-5

Tax payable (saving) 8,400 2,093 1,890 2,888 1,485 -1,718 Years 0-5

Cash Flows

Sale of MATRIX 35,000 Year 0

Cost of DELTA -140,000 Year 0

Scrap foregone (old) -5,000 Year 5

Repair costs saved (old) 28,000 Year 0

Maintenance saved (old) 7,000 7,000 7,000 7,000 7,000 Years 1-5

Major service saved (old) 4,000 Year 3

Selling price (new) 60,000 Year 5

Labour saving (new) 5,250 5,500 5,750 6,000 6,250 Years 1-5

Electricity saving (new) 4,725 4,800 4,875 4,950 5,025 Years 1-5

Maintenance (new) -2,000 -3,000 -4,000 -5,000 -6,000 Years 1-5

LESS TAX -8,400 -2,093 -1,890 -2,888 -1,485 1,718 Years 0-5

CASH FLOWS -85,400 12,883 12,410 14,738 11,465 68,993 years 0-5

Discount factors at cost of capital 1 0.9009 0.8116 0.7311 0.6587 0.5934 years 0-5

Discounted cash flows (DCF) -$85,400 $11,606 $10,072 $10,776 $7,552 $40,944 Years 0-5

Net Present Value (sum of DCF) -$4,450 year 0