Question

ABC Printing Corporation is considering purchasing a new printing machine. The following information relates to the proposed machine: The proposed machine will be disposed at the end of its usable life of four years at an estimated sale price of K800 000. The machine has an original purchase price of K8 000 000, installation cost of K500 000, and will be depreciated under the five year WTA using the rates provided below. WTA Depreciation Schedule Year Depreciation Rate 1 25% 2 40% 3 15% 4 15% 5 5% The machine is expected to generate the following revenues and expenses: Year 2019 2020 2021 2022 Revenues K3 000 000 K6 000 000 K4 000 000 K2 000 000 Expenses (excluding depreciation, interest, taxes) K150 000 K200 000 K450 000 K250 000 This machine will require increases in cash of K50 000, Accounts Receivable of K75 000, Inventories of K20 000, Accounts Payables of K30 000 and a Bank Overdraft facility of K30 000. At the end of the project, the firm is expected to recover K30 000 in working capital. The firm is subject to a 35 percent tax rate and a 10 percent cost of capital. Calculate the: A. Depreciation Schedule of the machine for the years 2019 to 2022 [4 Marks] B. Initial Investment of the machine [6 Marks] C. Operating Cash Flows of the machine [16 Marks] D. Terminal Cash Flow of the machine [4 Marks] E. Net Present Value of the project and provide a recommendation on the viability of the project. [6 Marks]

Answer 1

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