this is Financial Management. please do 5 6 7, thank you George is currently con
ID: 2810388 • Letter: T
Question
this is Financial Management. please do 5 6 7, thank you
George is currently considering the replacement of an old grinder in his workshop. The old grinder was purchased 3 years ago for $40,000. It is being depreciated using the prime (straight line) depreciation method. Its life is 5 years with no salvage value at the end of the 5th year. A trader has offered George $25,000 for the old grinder The new grinder which George would like to purchase costs $70,000. The installation cost is S5,000. This grinder would also be depreciated over 5 years using the prime method. However, at the end of the 5th year, its expected sales value is $5,000. The new grinder requires an increase of $7,550 in net working capital. Tax rate is 30% Annual revenue and expenses before depreciation, interest and tax are estimated below: PERIOD NEW GRINDER OLD GRINDER Revenue 500,000 500,000 500,000 500,000 500,000 Revenue Year 1550,000 Year 2 575,000 Year 3600,000 Year 4 625.000 Year 5625,000 Expenses 490,000 505,000 525,000 545,000 545,000 Expenses 445,000 445,000 445,000 445,000 445,000 1) Calculate the initial investment associated with the new grinder 2) Calculate the relevant (incremental) operating net cash flows. Explain why interest should not 3) Calculate the terminal cash flows 5) Calculate the net present values of the incremental cash flows using costs of capital of 8.00%, be included as a project cost. 4) Prepare a table with all the incremental cash flows of the project. 12.00%, 16.00% and 20.00%. Comment on the change in the NPV when the cost of capital changes change accordingly? accepted? 6) Calculate the internal rate of return. If the cost of capital changes, will the internal rate of return 7) At which cost of capital (analyse the four situations given in part 5) will the project be NOTE: Please provide all workings, calculations and explanations. Marks are given throughout the assignment answers. A right process but wrong end results will still receive marksExplanation / Answer
New Grinder New Grinder Increamental Cashflow Increamental Cashflow-Net Year Revenue Expense Revenue Expense Revenue Expense Net Cashflow 1 550,000 490,000 500,000 445,000 50,000 45,000 5,000 2 575,000 505,000 500,000 445,000 75,000 60,000 15,000 3 600,000 525,000 500,000 445,000 100,000 80,000 20,000 4 625,000 545,000 500,000 445,000 125,000 100,000 25,000 5 625,000 545,000 500,000 445,000 125,000 100,000 25,000 Tax rate 30% Year-1 Year-2 Year-3 Year-4 Year-5 Increamental revenue 5,000 15,000 20,000 25,000 25,000 Less: Depreciation as per table given below 7,000 7,000 15,000 15,000 15,000 Profit before tax (2,000) 8,000 5,000 10,000 10,000 Tax (600) 2,400 1,500 3,000 3,000 Profit After Tax (1,400) 5,600 3,500 7,000 7,000 Add Depreciation 7,000 7,000 15,000 15,000 15,000 Cash Profit After tax 5,600 12,600 18,500 22,000 22,000 New Machine Old Machine Cost of macine 75,000 16,000 Depreciation 75,000 - WDV - 16,000 Sale price 5,000 25,000 Profit/(Loss) 5,000 9,000 Tax @ 35% 1,500 2,700 Sale price after tax 3,500 22,300 Initial Invesment in Machine/Equipment 52,700 Old Machine cost 40,000 Annual depreciation-SLM 8,000 WDV after 3 years 16,000 Depreciation on New Depreciation Year-1 Year-2 Year-3 Year-4 Year-5 Total Depreciation Cost 75,000 75,000 75,000 75,000 75,000 Dep Rate 20.00% 20.00% 20.00% 20.00% 20.00% Deprecaition 15,000 15,000 15,000 15,000 15,000 75,000 Depreciation on Old Depreciation Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Total Depreciation Cost 16,000 16,000 16,000 16,000 16,000 16,000 Dep Rate 50.00% 50.00% Deprecaition 8,000 8,000 - - - - 16,000 Increamental Depreciation 7,000 7,000 15,000 15,000 15,000 - 59,000 Calculation of Annual Cash flow Year Captial Working captial Operating cash Annual Cash flow 0 (52,700) (7,550) (60,250) 1 5,600 5,600 2 12,600 12,600 3 18,500 18,500 4 22,000 22,000 5 3,500 7,550 22,000 33,050 Solution 5 8.00% 12% 16% 20% NPV@ 0.08 NPV@ 0.12 NPV@ 0.16 NPV@ 0.2 Year Cash flow PV factor PV-Cash flow PV factor PV-Cash flow PV factor PV-Cash flow PV factor PV-Cash flow 0 (60,250) 1.000 (60,250) 1.000 (60,250) 1.000 (60,250) 1.000 (60,250) 1 5,600.00 0.926 5,185 0.893 5,000 0.862 4,828 0.833 4,667 2 12,600.00 0.857 10,802 0.797 10,045 0.743 9,364 0.694 8,750 3 18,500.00 0.794 14,686 0.712 13,168 0.641 11,852 0.579 10,706 4 22,000.00 0.735 16,171 0.636 13,981 0.552 12,150 0.482 10,610 5 33,050.00 0.681 22,493 0.567 18,753 0.476 15,736 0.402 13,282 NPV 9,087 Total PV 697 Total PV (6,320) Total PV (12,236) Solution 6 IRR =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV) =12%+ (16%-12%)*(697/(697+6439)) 12.39% IRR will not change based on different cost of capital as IRR represents the return generated by project. Solution 7 Since NPV is positive till 12% cost of capital, the project should be accepted till there. Post that NPV turns negative so the project should not be accepted.
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