Assignment
After conducting market research that cost $20,000, Chrome Ltd is considering the purchase of a new machine for their printing business. The machine will cost $440,000 and Chrome will need to spend another $10,000 to install the machine. The machine will be installed in a building the company owns. This building is currently being rented out under a 10-year lease agreement signed 6 years ago. The lease payment is $30,000 a year and the next payment due at the end of one year. Under the lease agreement, Chrome can cancel the lease today by paying the tenant compensation equal to one year's rental payment plus 10%, but this amount is not deductible for income tax purposes.
The new machine will increase the company's revenue by $250,000 per year but the variable costs will also increase by $35,000 per year and fixed costs will increase by $10,000 per year. The machine will be depreciated on a straight-line basis to zero salvage value over the 4 years life of the project. Chrome believes it can sell the machine at the end of 4 years for $20,000.
The company will require additions to current assets of $35,000 at the beginning of the project, which will be fully recoverable at the end of the fourth year.
The required payback of the company is 2 years, and the required rate of return is 10% p.a. The company tax rate is 30%.
As a financial manager of the company, you're conducting a capital budgeting analysis of this project.
A. Calculate the tax effects and the incremental cash flows for each year (Y0 to Y4 inclusive).
B. Calculate the payback period of the project. (Show answer correct to two decimal places.)
C. Calculate the net present value of the project. (Show answer correct to the nearer cent.)
D. Calculate the present value index of the project. (Show answer correct to four decimal places.)
E. Calculate the discounted payback period of the project. (Show answer correct to two decimal places)
F. Calculate the internal rate of return of the project using 'trial & error and interpolation' method. (Show answer correct to four decimal places)
G. Now consider the following scenario: ASL only achieve $225,000 increase in revenue per year, all other projections remain unchanged. Calculate the incremental cash flows for each year (Y0 - Y4) and net present value.
H. Combining all the analysis, evaluate if ASL should accept the project or not.