MARC Printing Ltd. is considering the purchase of a new copy machine. The machine will cost...

MARC Printing Ltd. is considering the purchase of a new copy machine. The machine will cost $90,000 plus $6,000 for shipping and $4,000 for installation. The machine’s useful life is four years and falls under the straight line depreciation (with no salvage value). Operating of this printing machine requires additional inventories of $32.000. On the other hand, $12.000 of the inventories will be on account and receivable of the project. Will be $5.000. MARC Ltd. forecasts that new machine will increase the annual revenues by $100,000 for the next 4 years and this new machine will have $60,000 operating expenses annually. The machine will be sold for $10.000 at the end of the project life. The tax rate of MARC Ltd. is 30%.

a) Compute the initial cash out flow of this project.

b) What is the amount of operating cash flows for four years?

c) Compute the terminal cash flow of this project.

d) If company’s cost of capital is 10%, should company undertake this project (support your answer with the NPV of the Project )?

Solutions

Expert Solution

Formulas Used:-

Cost of Machine	90000
Shiping Cost	6000
Installation	4000
Life	4
Working Capital	32000
*Initial Cashouflow*	*=B1+B2+B3+B5*
*operating Cashflow*
Annual Revenue	Operating Expence	Depriciation	Profir before tax	After Tax	Net Cashflow
100000	60000	22500	=A9-B9-C9	=D9*(1-30%)	=E9+C9

Residule of machine	10000
Working Capital	=B5
*Terminal Cashflow*	*=B11+B12*

*year*	0	1	2	3	4	*NPV*
*Cashflow*	*=-B6*	*=$F$9*	*=$F$9*	*=$F$9*	*=$F$9+B13*	*=NPV(10%,C16:F16)+B16*

Depriciation = (cost of marchine-salvage value)/Life of machine

= (100000-10000)/4 = 22,500

jeff jeffy answered 1 year ago

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