Question

Floki Shipbuilding is considering purchasing a new fully integrated Computer Aided Design system. The new equipment can be purchased for $800,000 plus shipping and installation costs of $60,000. The company has already spent $55,000 on rewiring the rooms for the new system. The new machine is expected to have a useful life of seven years, at which time it will have a value of $130,000. The company estimates it will save $180,000 in annual operating cash outflows. Floki's weighted average cost of capital of 11% and its corporate tax rate is 31%. The CCA rate for the new system will be 30%. Floki plans to finance the new equipment with a bank loan requiring blended (i.e. principal and interest) quarterly payments of $58,000 over the next seven years. Use of this new system will reduce net operating working capital by $45,000.

Should Floki's Shipbuilding purchase this equipment? Show your work.

Floki's Shipbuilding Company Income Statement
For the Period (Millions USD)	2020
Revenue	270
Cost Of Goods Sold	154
Gross Profit	116
Selling General & Admin Exp.	74
Depreciation & Amort.	11
Operating Income	32
Interest Expense	6
Earnings Before Tax	26
Income Tax Expense	8
Net Income	18
Per Share Items
EPS	0.40
Common Shares Outstanding	44.1
Dividends per Share	$0.15
Payout Ratio %	36.9%
Floki's Shipbuilding Company
Balance Sheet (Millions USD)	2020
ASSETS
Cash And Equivalents	-
Accounts Receivable	21
Inventory	120
Prepaid Exp.	4
Total Current Assets	145
Gross Property, Plant & Equipment	244
Accumulated Depreciation	(86)
Net Property, Plant & Equipment	158
Other long term operating assets	52
Total Assets	355
LIABILITIES
Accounts Payable	26
Accrued Exp.	-
Short-Term Debt	37
Other Current Liabilities	14
Total Current Liabilities	76
Long-Term Debt (Par value)	70
Other Non-Current Liabilities	29
Total Liabilities	176
Total Equity	179
Total Liabilities And Equity	355

Answer 1

PV of 58000 for 28 payments	$                                            -8,60,000.00
PV of salvage	$                                                62,615.59
PV of Cashflows	$                                             3,87,284.17
Release of NWC	$                                                40,540.54
PV of NWC back in 7th year end	$                                               -21,674.63
NPV	$                                            -3,91,234.32
Savings in Annual operating cashflows	$                                             1,80,000.00	$                                                        1,80,000.00	$                        1,80,000.00	$                        1,80,000.00	$                        1,80,000.00	$                        1,80,000.00	$                        1,80,000.00
Less: Depreciation	258000	180600	126420	88494	61945.8	43362.06	30353.442
Less: Interest	168793.2349	155054.6435	138329.8387	117969.7384	93184.17679	63011.23767	26279.92331
Incremental profits before tax	$                                            -2,46,793.23	$                                                      -1,55,654.64	$                          -84,749.84	$                          -26,463.74	$                            24,870.02	$                            73,626.70	$                        1,23,366.63
Tax benefit	$                                               -76,505.90	$                                                         -48,252.94	$                          -26,272.45	$                            -8,203.76	$                              7,709.71	$                            22,824.28	$                            38,243.66
Incremental profits after tax	$                                            -1,70,287.33	$                                                      -1,07,401.70	$                          -58,477.39	$                          -18,259.98	$                            17,160.32	$                            50,802.42	$                            85,122.98
Add: Depreciation	258000	180600	126420	88494	61945.8	43362.06	30353.442
Incremental cashflows after tax	$                                                87,712.67	$                                                           73,198.30	$                            67,942.61	$                            70,234.02	$                            79,106.12	$                            94,164.48	$                        1,15,476.42
PV factor @11%	0.90	0.81	0.73	0.66	0.59	0.53	0.48
PV of Incremental cashflows after tax	$                                                79,020.42	$                                                           59,409.38	$                            49,679.05	$                            46,265.32	$                            46,945.63	$                            50,344.18	$                            55,620.19
PV of Incremental cashflows after tax	$                                             3,87,284.17

As NPV is negative, Machine should not be bought

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