You have been asked to evaluate the proposed purchase of a new machine by your company. The price of the new machine is £250,000, and it will cost an additional £25,000 to adapt it to the company’s purpose. The company might try to sell the machine after five years, but it is very unlikely to get a meaningful (material) price. Depreciation is based on the straight-line method. Use of the machine would require an increase in net working capital of £15,000, which would be recovered in the final year of the investment. The machine is expected to save the firm £50,000 per year in operating costs. The corporate tax rate is 40%. Required: a. What is the initial investment outlay associated with the machine purchase? b. What is the terminal cash flow in year five? c. Critically examine the treatment of working capital in the above case.
2 You have been asked to evaluate the proposed purchase of a new machine by your company. The
price of the new machine is £250,000, and it will cost an additional £25,000 to adapt it to the
company’s purpose. The company might try to sell the machine after five years, but it is very unlikely
to get a meaningful (material) price. Depreciation is based on the straight-line method.
Use of the machine would require an increase in net working capital of £15,000, which would be
recovered in the final year of the investment.
The machine is expected to save the firm £50,000 per year in operating costs. The corporate tax rate
is 40%.
Required:
a. What is the initial investment outlay associated with the machine purchase?
b. What is the terminal cash flow in year five?
c. Critically examine the treatment of working capital in the above case.
d. If the project’s required
e. Undertake a detailed critical evaluation of how your company could increase the
project by using debt finance.
Question = 25 marks
Step by step
Solved in 4 steps
