Quattro Ltd. sells round pizza bases in the local market. The company is considering expanding by acquiring a new square press for pizza bases. The machine will cost R5 000 to buy, install and get into a working order. It is expected that the machine will generate sales of R5 000 per year with associated variable costs equal to 40% of sales per year and fixed cost of R500 per year. The machine has a useful life of 4 years and depreciation will amount to R1 250 per year for the useful life of the machine. At the end of its life, the machine is expected to be worth R0 and will be donated for recycling. The tax rate is 28% and the company uses its WACC of 10% as the discount rate when evaluating new machines.

Required:

Determine the NPV of the new machine and state whether it would be acceptable to undertake the project or not.

Answer rating: 100% (QA)

To determine the Net Present Value NPV of the new machine we need to calculate the cash flows for ea... View the full answer