Problem:
Levelhead Company is considering the purchase of a new machine which will cost $1,000,000 (including installation and freight costs). The machine has an estimated useful life of five years, after which it can be sold for $350,000. If the new machine is purchased, the company estimates that the after-tax cash inflows will be as follows:
Years 1 - 3 $300,000
Years 4 - 5 $250,000
The after-tax cash outflows are expected to be $60,000 each year.
The company has a discount rate of 9 percent. Assuming Levelhead Company is not integrated with the dividend imputation system, should the firm purchase the new machine?
|
|
Year |
Year |
Year |
Year |
Year |
Year |
|
|
|
|
|
0 |
1 |
2 |
3 |
4 |
5 |
|
Reuired Rate Of Return |
9.00% |
| Pruchase Price |
######## |
|
|
|
|
|
|
|
|
| Inflow |
|
|
$300,000 |
$300,000 |
$300,000 |
$250,000 |
$250,000 |
|
|
|
| OutFlow |
|
|
($60,000) |
($60,000) |
($60,000) |
($60,000) |
($60,000) |
|
|
|
| Sale Price |
|
|
|
|
|
$350,000 |
|
|
|
| Net Cash Flow |
######## |
$240,000 |
$240,000 |
$240,000 |
$190,000 |
$540,000 |
|
|
|
|
|
|
1.09 |
1.1881 |
1.295029 |
1.411582 |
1.538624 |
|
|
|
| PV Cash Flow |
######## |
$220,183 |
$202,003 |
$185,324 |
$134,601 |
$350,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NPV |
93,074 |
|
|
|
|
|
|
|
|
|
The company should purchase the automated machine as the NPV > 0.