Question

a) An increased number of manufacturing companies are investing in advanced manufacturing systems. Two major benefits of these systems are greater flexibility in the manufacturing process and improvements in product quality. Briefly explain how these benefits create problems when performing discounted cash flow analysis.

b) A division manager prepared a proposal for a capital project. The project was evaluated using capital budgeting techniques and eventually the firm decided not to fund and pursue the project. The manager observed, “The Company’s post-audit process will show that this project should have been funded.” Comment on the manager’s understanding of the post-audit process.

c) Bestie Corporation is considering the acquisition of a new machine that costs $350,000. The machine is expected to have a 4-year service life and will produce annual savings in cash operating costs of $100,000. Bestie uses the straight-line method of depreciation and depreciates the asset as follows – ½ year depreciation in Year 1, full year depreciation in Years 2 to 4 (inclusive), and ½ year depreciation in Year 5. The company is subject to a 30% tax rate, has an after-tax hurdle rate of 12% and rounds calculations to the nearest dollar. Calculate the machine’s Net Present Value. Is the machine is an attractive investment? Why?

Answer 1

Question 1 :

Estimating Future Revenues may not accurate.

Stock Evaluation or closing stock will consider for DCF

Question No 2: Leasing Vs Procurement  

Funding or Procuring will depends on the following Aspects: Type of Lease, NPV and Payback period for Investment and IRR. If NPV is more Positive then we can opt for that

Question No:3

Details	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Reveune	1,00,000	1,00,000	1,00,000	1,00,000	1,00,000	5,00,000
Tax @	30%	30%	30%	30%	30%
	70,000	70,000	70,000	70,000	70,000	3,50,000
Depreciation	43,750	87,500	87,500	87,500	43,750	3,50,000
PAT	26,250	-17,500	-17,500	-17,500	26,250	-
12%	0.893	0.797	0.712	0.636	0.567
NPV	23,438	-13,951	-12,456	-11,122	14,895	804

NPV is positive, hence benifte to the Assessee