Question

• The cost to purchase “New Tech” will be $421,000 and will have a useful life of 6 years; “New Tech” will have a salvage value of $26,000 at the end of 6 years. The cost to purchase “Standard Classic” will be $235,000 and will also have a useful life of 6 years; “Standard Classic” will have a salvage value of $5,000 at the end of 6 years.

• Total Contribution Margin from the sale of Widgets will be different for each machine because the “Standard Classic” machine requires more variable manufacturing overhead costs. The expected contribution margin if the “New Tech” machine is chosen is the following:

Year	Total Contribution Margin
1	$180,000
2	$300,000
3	$360,000
4-6	$440,000

The contribution margin if the “Standard Classic” is chosen is expected to be the following:

Year	Total Contribution Margin
1	$175,000
2	$280,000
3	$355,000
4-6	$438,000

• Working Capital of $53,000 will be required at the beginning of the production of Widgets for the “New Tech” machine, and working capital of $95,000 will be required at the beginning of the production of Widgets for the “Standard Classic” machine. For both machines the working capital will be released at the end of the project (i.e., end of year 6).

• The yearly cost of machine maintenance will be $50,000 for the “New Tech” and will be $72,000 for the “Standard Classic” machine.

• Other fixed costs for salaries, property taxes, and insurance, which will be the same regardless of the machine chosen, will be the following:

Year	Total Other Fixed Costs
1-2	$180,000
3	$150,000
4-6	$120,000

• The “Standard Classic” machine will require a major overhaul that will cost $100,000 at the end of year 3 of the project. This will not apply to the “New Tech” machine.

• The Required Rate of Return for Starliper Industries is 9%.

• Use the “Total-Cost Approach”

Answer 1

		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate=Required Return=9%=0.09
		N=Year   of Cash Flow
		Income Tax Rate is not mentioned
		Income Tax is not taken into consideration
		ANALYSIS OF "NEW TECH MACHINE" INVESTMENT
		Annual Depreciation =(421000-26000)/6=	$65,833
	N	Year	0	1	2	3	4	5	6
	A	Initial investment in machine	-$421,000
	B	Initial investment in Working Capital	-$53,000
	c	Contribution Margin		$180,000	$300,000	$360,000	$440,000	$440,000	$440,000
	d	Cost of machine maintenance		-$50,000	-$50,000	-$50,000	-$50,000	-$50,000	-$50,000
	e	Other Fixed Costs		-$180,000	-$180,000	-$150,000	-$120,000	-$120,000	-$120,000
	f	Depreciation expenses		-$65,833	-$65,833	-$65,833	-$65,833	-$65,833	-$65,833
	g=c+d+e+f	Operating Income		-$115,833	$4,167	$94,167	$204,167	$204,167	$204,167
	h	Add:Depreciation (Non Cash expense)		65,833	65,833	65,833	65,833	65,833	65,833
	X=g+h	Annual Operating Cash Flow		-$50,000	$70,000	$160,000	$270,000	$270,000	$270,000
	Y	Terminal Salvage Cash Flow							$26,000
	Z	Working Capital Release							$53,000
	CF=A+B+X+Y+Z	Net Cash Flow	-$474,000	-$50,000	$70,000	$160,000	$270,000	$270,000	$349,000	SUM
	PV=CF/(1.09^N)	Present Valure	-$474,000	-$45,872	$58,918	$123,549	$191,275	$175,481	$208,097	$237,449
	NPV=Sum of PV	Net Present Value	$237,449