Question: 1. Advanced Industrial Corp. is considering buying a new crane that can be rented to other interested businesses. The crane cost SR 150,000 to purchase and SR 20,000 for shipping. The crane will be fully depreciated using straight-line depreciation method over 4 years. After 4 years, the crane is expected to be sold for SR 40,000. Advanced Industrial Corp. is expected to collect revenue from renting the crane as follows:
Year Revenue
1 SR 70,000
2 SR 65,000
3 SR 60,000
4 SR 55,000
Operating expenses including maintenance expenses is expected to be 10% of the revenue in each year. Operating expenses does not include depreciation expenses. Advanced Industrial Corp. is expected to increase their investment in net working capital by SR 10,000 due to the new crane in the initial year with no further changes in the NWC expected. Assume a tax rate of 35% and cost of capital 10%.
Calculate initial investment (NINV) for the crane
Calculate operating cash flows for year 1,2,3,4
Calculate the terminal cash flow
Complete the table below and Calculate the NPV, IRR, and payback period for the project
CF0
CF1
CF2
CF3
CF4
Do you accept or reject the project, and why?
2. A Chilean mining company can buy heavy-duty excavators for 150 million pesos each. The excavators can be depreciated straight-line over 5 years. The depreciation is tax deductible at 30% . the company can also lease the excavators for 5 years at 35 million pesos per year. The lease payment would be tax-deductible. Should the buy or lease. Assume discount rate of 9%.