Bottle Limited is considering replacing its current bottling machine with a newer and more efficient one. The current machine has a book value of $25,000 and has 5 years useful life remaining. If it was sold now the firm could raise $25,000.
The price to purchase a new machine is $240,000, and shipping and installation costs would be $10,000. Estimated useful life of the new machine is 5 years, and at the end of its useful life it is estimated that it will have a salvage value of $50,000.
If installed, the new machine is expected to increase gross revenues by $65,000 per annum and annual operating costs would also decrease by $15,000 per annum.
There would be a $20,000 increase in working capital, only 20% of which is recoverable at the end of the machine’s life.
Capital Allowances is available on the straight line basis.
The company’s cost of capital is 20%
The tax rate is 40%
Required :
(i) What is the initial investment
(ii) What is the annual operating after tax cash flow
(iii) Determine the terminal cash flow.
(iv) Compute the Net Present value of the investment and advise the company if it should go ahead with the project.