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Assignment #4 Magic Timber & Steel

This document presents a financial analysis comparing the costs and benefits of purchasing a new machine (Delta-A390) versus keeping an existing machine (Matrix-750). It includes cash flows over a 5 year period related to purchase/sale prices, maintenance costs, depreciation, tax implications, and salvage value. Several sensitivity analyses are conducted by changing the discount rate, sale price of the new machine in year 5, and maintenance costs. Based on the analyses, a recommendation is provided to Davidson on whether to purchase the new machine or keep the existing one based on the net present value calculations.

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3K views

Assignment #4 Magic Timber & Steel

This document presents a financial analysis comparing the costs and benefits of purchasing a new machine (Delta-A390) versus keeping an existing machine (Matrix-750). It includes cash flows over a 5 year period related to purchase/sale prices, maintenance costs, depreciation, tax implications, and salvage value. Several sensitivity analyses are conducted by changing the discount rate, sale price of the new machine in year 5, and maintenance costs. Based on the analyses, a recommendation is provided to Davidson on whether to purchase the new machine or keep the existing one based on the net present value calculations.

Uploaded by

ASAD ULLAH
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Subject

Topic
Submitted to
Submitted by
Date

NPV of Purchasing De
Calculation of Tax 0
Repair costs saved (old) 28,000
Maintenance saved (old)
Major service saved (old)
Labour saving (new)
Electricity saving (new)
Maintenance (new)
Depreciation foregone (old)
Depreciation (new)
Profit/loss on sale (new)
Taxable income 28,000
Tax payable (saving) 8,400

Cash Flows 0
Sale of MATRIX 35,000
Cost of Delta -140,000
Scrap foregone (old)
Repair costs saved (old) 28,000
Maintenance saved (old)
Major service saved (old)
Selling price (new)
Labour saving (new)
Electricity saving (new)
Maintenance (new)
LESS TAX -8,400
CASH FLOWS -85,400
Discount factors at cost of capita 1
Discounted cash flows -85400
Net Present Value $3,387

We are now going to further explore some important aspects of the case study MAGIC
1. Conduct the following sensitivity analyses:
a) Change the discount rate to 12 per cent.
b) Change the Year 5 selling price of the Delta to $80,000.
c) Change the maintenance costs for the Delta: Year 1 costs are $1,000, increasing by $1,00
d) Change all of the above factors together.
2. Based on your answers to questions in Assignment 1 and above question, write a 500-wo

In this situation where you are confused to buy new machine (Delta-A390) or stay with exis
In this case if the value of NPV is negative then we go with existing machine (Matrix-750) b
In previous task where we have some inflows and out-flow for old and new machine that is,
Same with the new machine where we also have some of their inflows and outflows, in the c
In Second Task
In second task where we do some changing with change in the discount rate 11 per cent to12
Corporate Finance
Magic Tiber & Steel
Dr.Zaheer Anwer
Aleem Inam
05--1-2020

NPV of Purchasing Delta


1 2 3 4 5

7,000 7,000 7,000 7,000 7,000


4,000
5250 5500 5750 6000 6250
4725 4800 4875 4950 5025
-1,000 -2,000 -3,000 -4,000 -5,000
6,000 6,000 6,000 6,000 6,000
-14,000 -14,000 -14,000 -14,000 -14,000
10,000
7,975 7,300 10,625 5,950 15,275
2392.5 2190 3187.5 1785 4582.5

1 2 3 4 5

-5,000

7,000 7,000 7,000 7,000 7,000


4,000
80,000
5,250 5,500 5,750 6,000 6,250
4,725 4,800 4,875 4,950 5,025
-1,000 -2,000 -3,000 -4,000 -5,000
-2,393 -2,190 -3,188 -1,785 -4,583
13,583 13,110 15,438 12,165 83,693
0.892857142857143 0.79719388 0.71178025 0.6355181 0.5674269
$12,127 $10,451 $10,988 $7,731 $47,489

pects of the case study MAGIC TIMBER AND STEEL. Please answers of the following questions:-

s are $1,000, increasing by $1,000 each year.

above question, write a 500-word report to Davidson to present your recommendation.


Report for Davidson
ne (Delta-A390) or stay with existing machine (Matrix-750).For taking the decision, we use the method of Net
existing machine (Matrix-750) but if the value of NPV is positive then we go with new machine (Delta-A390
for old and new machine that is, if we sell old machine at point zero we receive $35,000 if we continue with o
eir inflows and outflows, in the case of new machine, if we purchase then we pay $140,000 at point zero have

the discount rate 11 per cent to12 per cent, change the selling price of the Delta after five year is $60,000 to $8
ng questions:-

the method of Net Present Value (NPV), NPV shows the clear picture of all the inflows and outflows is the pr
achine (Delta-A390).
we continue with old machine firstly we give $28,000 for their repairing, $7000 each next five year for mainte
0 at point zero have their straight line depreciation at the rate of 10% which is$ 14,000 each for next five year,

ear is $60,000 to $80,000 and change the maintenance costs for the Delta year 1 costs are $2,000 increasing by
ws and outflows is the project on the basis of NPV we decide whether to select the project or not.

next five year for maintenance,$ 4000 for special maintenance in the third year and $6000 their depreciation fo
each for next five year, it also have maintenance cost for the first year is $2000 then add $1000 for each next

are $2,000 increasing by $1,000 each year to $1,000, increasing by $1,000 each year. Due to this changing we
ject or not.

000 their depreciation for each five years after the five year scrap value of old machine is 5000.
dd $1000 for each next four year with some electricity and labor saving which is calculated by $5.625 per hou

Due to this changing we receive $10,000 capital gain in the selling of Delta after five year at the amount of $8
e is 5000.
ulated by $5.625 per hour*24 hours*7 days*50 weeks*10% then add $75 for each in next four year, per hour $

year at the amount of $80,000 and also have advantage due to low maintenance cost compared to the previous
ext four year, per hour $30*35 hours per week*50 week in a year*10% and then add $250 for each in next fou

mpared to the previous task in this case after analysis of all in flow and out flows we receive a positive NPV w
250 for each in next four year respectively. On the basis of those values in previous task we calculated the NP

eceive a positive NPV which is $3,387 it show we go with new machine Delta-A390.
sk we calculated the NPV which gives negative value that shows we continue with Old Machine.
d Machine.

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