Sensortech Saudi Manufacturing Company limited is considering purchasing a new i
ID: 1124093 • Letter: S
Question
Sensortech Saudi Manufacturing Company limited is considering purchasing a new injection-modeling machine for $250,000 to expand its production capacity. It will cost an additional $20,000 to do the site preparation. With the new injection-modeling machine installed, Sensortech Saudi Manufacturing expects to increase its revenue by $90,000. The machine will be used for five years, with an expected salvage value of $75,000. At an interest rate of 12%, would the purchase of injection-modeling machine be justified? Note: Initially, identify cash flows, and then calculate present value and apply the decision criteria).Explanation / Answer
Cash outflow = 1 st year $ 250000 purchase of new machine
=. $ 20000 installation of machine
= 5 th year $ 205740 interest paid in compound
Cash inflow = $90000 as revenue after 1 st year and every year
=$90000 2nd year
=$90000 3rd year
=$90000 4th year
=$90000 5th year
=$75000 5th year as salvage
Calculation of present value
PV=fv ×{ 1÷(1+i)t}
=$525000×{1÷(1+.12)5}
=$525000×0.5675
=$297937
Hence present value of revenue (cash inflow) is greater than cost (cash out flow)
Total cash out flow in 5years =$475740
Total cash in flow in 5years =$525000
Decision -> company should execute the proposal because present value of project is greater.
At 12% interest rate project is justified.
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