5. UniTech Inc. is considering purchasing a new piece of machinery. The old mach

Question

5. UniTech Inc. is considering purchasing a new piece of machinery. The old machine, which was purchased 3 years ago for $5 million, has been depreciated straight-line over 5 years to a salvage value of $0. The old machine can currently be sold for $2 million. The new machine, which costs $10 million, will be depreciated over 5 years to a salvage value of $2 million. Revenues from the new machine are expected to be $2.5 million in year 1 and to then grow at a rate of 5% annually. Variable costs are 40% of each year

Explanation / Answer

Year0 Year1 Year2 Year3 Year4 Year5 Sales Revenue $ 2,500,000.00 $ 2,625,000.00 $ 2,756,250.00 $ 2,894,062.50 $ 3,038,765.63 Variable Cost $ 1,000,000.00 $ 1,050,000.00 $ 1,102,500.00 $ 1,157,625.00 $ 1,215,506.25 Fixed Cost $ 500,000.00 $ 500,000.00 $ 500,000.00 $ 500,000.00 $ 500,000.00 Depreciation $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00 Net Profit before Tax $ (600,000.00) $ (525,000.00) $ (446,250.00) $ (363,562.50) $ (276,740.63) Tax 0 0 0 0 0 Add: Depreciation $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00 $ 1,600,000.00 Net cash flow $ 1,000,000.00 $ 1,075,000.00 $ 1,153,750.00 $ 1,236,437.50 $ 1,323,259.38 Initial Investment Machine Cost $ 10,000,000.00 Post Tax salvage Value of old machine $ 2,000,000.00 Net Investment in machine $ (8,000,000.00) Change in Working capital required $ (250,000.00) $ (12,500.00) $ (13,125.00) $ (13,781.25) $ (14,470.31) $ 303,876.56 Net Cash flow $ (8,250,000.00) $ 987,500.00 $ 1,061,875.00 $ 1,139,968.75 $ 1,221,967.19 $ 1,627,135.94 Present value $ (8,250,000.00) $ 897,727.27 $ 877,582.64 $ 856,475.39 $ 834,620.03 $ 1,010,323.40 NPV $ (3,773,271.26)

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