Question

In: Finance

IBX Pty Ltd is considering the purchase of a new machine that is expected to save...

IBX Pty Ltd is considering the purchase of a new machine that is expected to save the company $84,000 at the end of each year in reduced wages.

The machine costs $288,000, plus another $16,000 to be installed. It is expected to last for five years after which it can be sold as scrap for $49,000. Operating expenses (such as fuel and maintenance) are $8,000 pa.

a)Determine the annual net cash flows of this investment (ignore the effect of taxes). Enter the information in the following table. Indicate whether cash flows are + or -:

Time 0 1 2 3 4 5
Net Cash Flow

b)Calculate the NPV if the required rate of return is 11% pa. Give your answer in dollars and cents to the nearest cent.

NPV11% = $

c)Calculate the NPV if the required rate of return is 13% pa. Give your answer in dollars and cents to the nearest cent.

NPV13% = $

Solutions

Expert Solution

Time 0 1 2 3 4 5
Savings in cost 0 84000 84000 84000 84000 84000
Less: Operating expenses 0 8000 8000 8000 8000 8000
Cash flow from operations 0 76000 76000 76000 76000 76000
Initial Investment -304000 0 0 0 0 0
Scrap sale 0 0 0 0 0 49000
Net Cash Flow -304000 76000 76000 76000 76000 125000
Discount Factor at 11% 1 0.900901 0.811622 0.731191 0.658731 0.593451
Discounted Cash flow at 11% -304000 68468.47 61683.30 55570.54 50063.55 74181.42
NPV at 11% =     5,967.29
Discount factor at 13% 1 0.884956 0.783147 0.69305 0.613319 0.54276
Discounted Cash flow at 13% -304000 67256.64 59519.15 52671.81 46612.22 67844.99
NPV at 13% = -10095.19

Excel Formulas:

Discount factor formula, without excel:


Where,
i = rate of return
n = number of periods


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