Sensortech Saudi Manufacturing Company limited is considering purchasing a new i

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, calculate present value and apply the decision criteria).

(2.5 marks,) 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 nection-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-mod eling machine be justified? Note ially, identify cash flows, calculate present value and apply the decision criteria) Question 4 (3 marks)

Explanation / Answer

New machine cost $250,000 Add: site preparation cost $20,000 Total investment $270,000 Life                   5 years Salvage value $75,000 Depreciiation per annum $39,000 assumed straghtline Increase in annual revenue $90,000 Less: Depreciation $39,000 Net Operating Income $51,000 Net Cash flow per annum $90,000 Interest rate 12% Period cash flow discounted @12% 0 ($270,000) -$270,000.00 1 $90,000 $80,357.14 2 $90,000 $71,747.45 3 $90,000 $64,060.22 4 $90,000 $57,196.63 5 $90,000 $51,068.42 5 $75,000 $42,557.01 NPV $96,986.87 As there is a positive NPV, the new machine can be bought.

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