Question

In: Finance

A firm is considering the introduction of a new automatic machine. The estimated costing data for...

A firm is considering the introduction of a new automatic machine. The estimated costing data for this project
are shown below.
Initial cost of the machine $240,000
Planning horizon 4 years
Salvage value after 4 years nil
Income $100,000 p.a.
Operational & maintenance cost $20,000 p.a.
MARR 10% p.a.
Economic assessment method NPV
The firm is confident about the estimated values of the initial cost and salvage value, but it feels that the
income and the operational cost are subject to error.
a. Express NPV as a function of x (% change in operational cost) and y (% change in income) and plot y as
a function of x. Comment on the result.
b. If there is no error with operational cost, what is the maximum percentage change in annual income
before the project becomes unviable?
c. If there is no error with annual income, what is the maximum percentage change in operational cost
before the project becomes unvi

Solutions

Expert Solution

Based on the given data, pls find below workings:

(a) Based on the below workings: NPV is $ 13589 and since the NPV is positive, this is a feasible and recommended project.

(b) Considering no error in operational cost, at 95.7% of the current revenue situation, the project shall become unviable (NPV shall become zero);

(c) Considering no error in the revenue, at 121.4% of the current operating cost situation, the project shall become unviable (NPV shall become zero);

The above limits are derived using GOAL SEEK option as well as using DATA TABLE option (Sensitivity Analysis) in EXCEL below;

SHOW FORMULA OPTION:

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A firm is considering the replacement of its existing machine with new automated machinery costing $850,000....
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000. The new machine will lead to an increase in cash sales of $280,000 p.a. Annual interest expense will increase from $15,000 to $25,000. Annual cash operating expenses are currently $300,000 and will decrease by $60,000 with the new machine. The new machine has a five-year life for tax purposes and for internal management accounting the firm assumes all non-current assets have a ten-year tax...
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000....
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000. The new machine will lead to an increase in cash sales of $280,000 p.a. Annual interest expense will increase from $15,000 to $25,000. Annual cash operating expenses are currently $300,000 and will decrease by $60,000 with the new machine. The new machine has a five-year life for tax purposes and for internal management accounting the firm assumes all non-current assets have a ten-year tax...
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000....
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000. The new machine will lead to an increase in cash sales of $280,000 p.a. Annual interest expense will increase from $15,000 to $25,000. Annual cash operating expenses are currently $300,000 and will decrease by $60,000 with the new machine. The new machine has a five-year life for tax purposes and for internal management accounting the firm assumes all non-current assets have a ten-year tax...
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000....
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000. The new machine will lead to an increase in cash sales of $280,000 p.a. Annual interest expense will increase from $15,000 to $25,000. Annual cash operating expenses are currently $300,000 and will decrease by $60,000 with the new machine. The new machine has a five-year life for tax purposes and for internal management accounting the firm assumes all non-current assets have a ten-year tax...
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000....
A firm is considering the replacement of its existing machine with new automated machinery costing $850,000. The new machine will lead to an increase in cash sales of $280,000 p.a. Annual interest expense will increase from $15,000 to $25,000. Annual cash operating expenses are currently $300,000 and will decrease by $60,000 with the new machine. The new machine has a five-year life for tax purposes and for internal management accounting the firm assumes all non-current assets have a ten-year tax...
A firm is considering the purchase of a new machine at a price of $108,000.  The machine...
A firm is considering the purchase of a new machine at a price of $108,000.  The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $15,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $5,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...
A firm is considering the purchase of a new machine at a price of $150,000.  The machine...
A firm is considering the purchase of a new machine at a price of $150,000.  The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $10,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $16,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...
A firm is considering the purchase of a new machine at a price of $120,000.  The machine...
A firm is considering the purchase of a new machine at a price of $120,000.  The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $15,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $5,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...
A firm is considering the purchase of a new machine at a price of $200,000.  The machine...
A firm is considering the purchase of a new machine at a price of $200,000.  The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $20,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $40,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...
Rump Industries is considering the purchase of a new production machine for $100,000. The introduction of...
Rump Industries is considering the purchase of a new production machine for $100,000. The introduction of the machine will result in an increase in earnings before interest and tax of $25,000 per year. Set-up of the machine will involve installation costs of $5,000 after-tax. Additionally, the machine will require workers to undergo training that will cost the company $5,000 after-tax. An initial increase in raw materials and inventory of $25,000 will also be required. The machine has an expected life...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT