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In: Finance

Swindler Ltd has completed a feasibility study costing $16769 to determine if there is any benefit...

Swindler Ltd has completed a feasibility study costing $16769 to determine if there is any benefit in purchasing a new asset. The machine will cost $318900 and an additional $14152 will need to spent to have the machine in operational state. Before the machine can be used staff must be trained at a further cost of $9602.

The project is expected to last for 5 years and the Taxation Office has confirmed this. At the end of the project the machine will be fully depreciated.

Initial advertising costs are expected to $20571 and additional stock of $68525 will be needed. Wages will change from $85000 to $39495 and Fixed Costs will remain at $59609.

The new machine is expected to produce sales of $1125787 in the first year and will grow by 10% each year of the project. Material costs will be 24% of sales in each year.

You are required to calculate the net cash flow (round to the nearest dollar and DO NOT include $ sign) that would appear in Year 1 of a Capital Budget.  

Assume the Australian Company tax Rate applies.

Solutions

Expert Solution

NET CASH FLOW In YEAR 1
Cash Flows:
Sales Revenue from new machine 1125787
Material Cost (24%) -270189 (1125787*24%)
Initial advertising cost -20571
Training cost -9602
Increase in wages -45505 (85000-39495)
Increase in fixed costs 0
Depreciation expense -66610 (318900+14152)/5
SUM 713310
Before tax incremental profit 713310
Tax expense(30%) 213993 (713310*30%)
Operating profit after tax 499317 (713310-213993)
Add Depreciation (no tax expense) 66610
Net Cash Flow in Year 1 565927 (499317+66610)
NOTE:
Initial investment in machine 333052 (318900+14152)
Useful Life in years 5
Annual depreciation rate =(100/5)% 20%
Annual depreciation 66610 (333052*20%
Feasibility study cost is sunk cost and not a relevant cost
Additional stock is part of initial investment in working capital in year 0

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