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Tutorial Cashflow
Tutorial Cashflow
QUESTION 1
Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in
addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta
expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the
machine using the straight-line method over the projects five year life to a salvage value of zero. The
machines purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate
of return is 12 percent.
QUESTION 2
A firm is trying to determine whether to replace an existing asset. The proposed asset has a purchase price
of $50,000 and has installation costs of $3,000. The asset will be depreciated over its five year life using
the straight-line method. The new asset is expected to increase sales by $17,000 and non-depreciation
expenses by $2,000 annually over the life of the asset. Due to the increase in sales, the firm expects an
increase in working capital during the assets life of $1,500, and the firm expects to be able to sell the
asset for $6,000 at the end of its life. The existing asset was originally purchased three years ago for
$25,000, has a remaining life of five years, and is being depreciated using the straight-line method.
However, the current sale price of the existing asset is $20,000, and its current book value is $15,625. The
firms marginal tax rate is 34 percent and its required rate of return is 12 percent.
RM165,000
RM42,000
RM22,000
d) Calculate the net present value the above proposed machine. Should this machine be purchased?
(RM1,120); No