Question

I can do the math for this assignment but am unable to justify a 3 page summation of my position. Thanks!

Allgood Incorporated is considering purchasing a new machine to replace a current machine. The new machine will cost $390,000 and use working capital of $9,000. The current machine can be sold for $6,500. The new machine has a five-year useful life and no salvage value. The hurdle rate is 8 percent. If the new machine is purchased, the operating cash inflows are listed below: Year 1 – $130,000. Year 2 – $130,000. Year 3 – $130,000. Year 4 – $130,000. Year 5 – $130,000 (this includes the $9000 release of working capital). Instructions For this assignment, address the following: Calculate the following elements of a capital budget (ignoring income taxes for this step): The payback period. Accounting rate of return. Internal rate of return. Assuming an income tax rate of 40 percent, calculate the net present value. Remember to calculate the after-tax cash flows from operations and the tax savings from depreciation expense in your analysis. Should Allgood purchase the machine? Write 3 pages justifying your position. Include a discussion of what qualitative factors you would consider.

Answer 1

Year	Cost of new machine	WC requirement	Sale value of current machine	Operating cashflow	Total cashflow
0	-390000	-9000	5600		-393400
1				130000	130000
2				130000	130000
3				130000	130000
4				130000	130000
5		9000		121000	130000

Payback period:-

Year	Total cashflow	Cumulative Inflow
0	-393400
1	130000	130000
2	130000	260000
3	130000	390000
4	130000	520000
5	130000	650000

Payback period will be years between 3 to 4 years:-

=3years +((1/(520000-390000))*(393400-390000))

= 3years+0.03

=3.03 years

Accounting rate of return:-

Average inflow in five years = 130000

Intial investment = 393400

Accounting rate of return = 130000/393400 =33.05%

Internal rate of Return:-

Year	Total cashflow
0	-393400
1	130000
2	130000
3	130000
4	130000
5	130000
IRR	19.47%
	IRR(F12:F17)

IRR calculated using excel formula=IRR(F12:F17)

NPV

NPV is 45054

Year	Total Cashflow	Dis factor @8%	Discounted cashflows
0	-393400	1	-393400
1	109200	0.9259	1,01,111
2	109200	0.8573	93,621
3	109200	0.7938	86,686
4	109200	0.7350	80,265
5	112800	0.6806	76,770
		NPV	45,054

Year	Total cashflow	After Tax Cashlows (1-0.40)*total cashflow	Working capital release	Tax Saving on depreciation	Total Cashflow
0	-393400	-393400			-393400
1	130000	78000		31200	109200
2	130000	78000		31200	109200
3	130000	78000		31200	109200
4	130000	78000		31200	109200
5	121000	72600	9000	31200	112800

Cost of machine (1)	390000
Salvage value (2)	0
Life in years (3)	5
Yearly depreciation (4)=((1)-(2))/(3)	78000
Tax rate (5)	40%
Yearly tax Saving on sepreciation(4)*(5)	31200

Since NPV is Positive project should be accepted.