Melanie Co

i)
Time 0 1 2 3
$ $ $ $
Lease
Payment -55000 -55000 -55000
PV factor at 8% 1 0.926 0.857
Present value -55000 -50930 -47135
Present value cost -153065

Borrow and Buy

Initial cost -160000
Residual value 40000
Maintenance -8000 -8000 -8000
Total -160000 -8000 -8000 32000
PV factor at 8% 1 0.926 0.857 0.794
Present value -160000 -7408 -6856 25408
Present value of cost -148856

As borrow and buy offest cheapest present value cost, the machine should be financed by borrowing

ii)

3 year replacement cy 0 1 2 3 4
$ $ $ $ $
Initial cost -160000
Residual value 40000
Maintenance -8000 -8000 -8000
Total -160000 -8000 -8000 32000
PV factor at 10% 1 0.909 0.826 0.751
Present value -160000 -7272 -6608 24032
Present value of cost -149848
EAC -60277

4 year replacement cost

Initial cost -160000
Residual value 11000
Maintenance -12000 -12000 -12000 -12000
Total -160000 -12000 -12000 -12000 -1000
PV factor at 10% 1 0.909 0.826 0.751 0.683
Present value -160000 -10908 -9912 -9012 -683
Present value cost -190515
EAC -60118.33
Recommendation: The machine should be replaced every 4 years as the equivalent annual cost is lower
Project E

Year 0 1 2 3 4 5
$'000 $'000 $'000 $'000 $'000 $'000

Sales 5670 6808 5788 6928

Variable cost -3307 -4090 -3514 -4040
Fixed cost -776 -803 -832 -861
Taxable cash flow 1587 1915 1442 2027
Taxation 444 536 404 568
Capital Expenditure -5000
Scrap Value 400
Tax benefit of tax depn 350 263 197 479
-5000 1587 1821 1169 2220 -89
Discount factor @ 13 1 0.885 0.783 0.693 0.613 0.543
Present value -5000 1404 1426 810 1361 -48
NPV -47
The net present value is negative and the investment is not financially worthwhile

Workings
1 Sales
Year 1 2 3 4
Price 450 475 500 570
Inflation 1.05 1.103 1.158 1.216
Volume 12000 13000 10000 10000
Revenue 5670000 6807938 5788125 6928386

2 Variable costs
Year 1 2 3 4
Price 260 280 295 320
Inflation 1.06 1.124 1.191 1.262
Volume 12000 13000 10000 10000
Costs 3307200 4089904 3513497 4039926

3 Fixed costs 1 2 3 4
Year 750 750 750 750
Inflation 1.035 1.071 1.109 1.148
Cost 776 803 832 861

4 Tax allowable depreciation tax benefits

Year 1 2 3 4
Tax allowable 5000000 1250000 937500 703125
Tax allowable depn 1250000 937500 703125 1709375 400000
Tax benefit @ 28% 350000 262500 196875 478625
AGD Co

i)Purchase

Year 0 1 2 3 4
$'000 $'000 $'000 $'000 $'000
Cash outflow
Cost -320
Maintenance cost -25 -25 -25
-320 -25 -25 -25
Cash inflow
Disposal proceed 50
Taxation at 30% 8 8 8
Tax allowable depn 24 18 39
Net cash flow -320 -25 7 51 47
Discount at 7% 1 0.935 0.873 0.816 0.763
PV of cash flow -320 -23 6 41 35
NPV -261
Working
Tax allowaTax benefitYearsof cash flow
$'000 $'000 $'000
Initial investment 320
Allowance at 25% on reducing balance

Year 1 -80 -80 24

240
Year 2 -60 -60 18
180

Proceeds on sale -50

Balancing allowance 130 39

Leaseing costs

Year 0 1 2 3 4
$'000 $'000 $'000 $'000 $'000
Cash outflow
Rental -120 -120 -120
-120 -120 -120
Cash inflow
Taxation at 30% 36 36 36
Net cash flow -120 -120 -84 36 36
Discount at 7% 1 0.935 0.873 0.816 0.763
PV of cash flow -120 -112 -73 29 27
NPV -249
Therefore the machine should be leased rather than purchased as the NPV of the cost is lower
Basril Co

Project 1

$ 12% DF $
Initial investment -300000 1 -300000
Year 1 85000 0.893 75905
Year 2 90000 0.797 71730
Year 3 95000 0.712 67640
Year 4 100000 0.636 63600
Year 5 95000 0.567 53865
32740

Profitability index 1.11

Project 2
$ 12% DF $
Initial investment -450000 1 -450000
Year 1 140800 0.893 125734
Year 2 140800 0.797 112218
Year 3 140800 0.712 100250
Year 4 140800 0.636 89549
Year 5 140800 0.567 79834
57584

Profitability index 1.13

Project 3

$ 12% DF $
Initial investment -400000 1 -400000
Year 1 124320 0.893 111018
Year 2 128796 0.797 102650
Year 3 133432 0.712 95004
Year 4 138236 0.636 87918
Year 5 143212 0.567 81201
77791

Profitability index 1.19

The most profitable projects are project 3 and 2, so if they are divisible it is recommended that Basril Co invests $400k in Proje
Basril Co invests $400k in Project 2 and balance of $400k in Project 3.
Degnis Co

Calculation of NPV over four years

Year 1 2 3 4
$'000 $'000 $'000 $'000
Sales income 12525 15030 22545 22545
Conversion cost 7913 9495 14243 14243
Contribution 4612 5535 8302 8302
Fixed costs 4000 5000 5500 5500
Before tax cash flow 612 535 2802 2802
Tax liability at 28% 171.36 149.8 784.56 784.56
Tax allowable depn 112 112 112 112
After tax cash flow 552.64 497.2 2129.44 2129.44
DF @ 11% 0.901 0.812 0.731 0.659
Present value 498 404 1557 1403

Total present value 3862

Initial investment 4000
NPV -138

Workings

Average selling price 50100

Average conversion unit 31650

Year 1 2 3 4
Sales volume 250 300 450 450
Average selling price 50100 50100 50100 50100
Sales income 12525000 15030000 22545000 22545000

Year 1 2 3 4
Sales volume 250 300 450 450
Average conversion cost 31650 31650 31650 31650
conversion costs 7912500 9495000 14242500 14242500
Nominal terms appraisal of the investment project

Year 1 2 3 4
$'000 $'000 $'000 $'000
Sales revenue 39375 58763 85085 32089
Variable cost 22046 31183 41327 17924
Contribution 17330 27580 43758 14165
Fixed costs 3180 3483 3811 3787
Cash flow before tax 14150 24097 39947 10378
Tax at 26% 3679 6265 10386 2698
Tad benefits 1300 975 731 2194
Cash flows after tax 11771 18807 30292 9873
DF @ 12% 0.893 0.797 0.712 0.636
Present values 10511 14989 21568 6279

$'000
Sum of PVs of future cash flow 53347
Initial investement 20000
NPV 33347

Workings

Year 1 2 3 4
Selling price 125 130 140 120
Inflation 5% 1.05 1.10 1.16 1.22
Inflated selling price 131.25 143.33 162.07 145.86
Sales volume ($'000) 300 410 525 220
Sales revenue ($'000) 39375 58763 85085 32089
Variable cost per unit 71 71 71 71
Inflation of 5% 1.035 1.071 1.109 1.148
Inflated varibale cost 73.49 76.06 78.72 81.47
Variable cost ($'000) 22046 31183 41327 17924
Fixed costs ($'000) 3000 3100 3200 3000
Inflation of 6% 1.06 1.12 1.19 1.26
Fixed costs ($'000) 3180 3483 3811 3787
TAD ($'000) 5000 3750 2813 8437
TAD benefits 1300 975 731 2194

Time 1 2 3 4
Nominal cash flows after tax 11771 18807 30292 9873
Deflated at 3.7% 0.964 0.930 0.897 0.865
Real cash flow 11351 17488 27164 8538
DF @ 8% 0.926 0.857 0.794 0.735
Present value 10511 14988 21568 6275
 $'000
Sum of present value 53341
Initial investment -20000
NPV 33341