1 of 4Fjord is considering the purchase of a new machine costing $103,000. This machine can be expected to save $17,750 at the end of each year for 8 years in reduced labour costs. The company's cost of capital is 9% pa effective, and the machine has an estimated scrap value (at the end of 8 years) of $22,000.
- Calculate the net present value (ignore the effect of taxes). Give your answer in dollars and cents to the nearest cent.
NPV = $
- According to the NPV calculated above:
One would recommend that the machine be purchased
One would NOT recommend that the machine be purchased
2 of 4A company that analyses projects based on after tax cash flows has invested in a project. The project has caused an increase in the tax payable by the company that has increased by $10,000.
Due to a special ruling by the tax office, the company has been given the choice of paying the $10,000 immediately or in exactly one year.
a)The company should:
pay the tax now
pay the tax in exactly one year
b)This is because:
the time value of money means that the $10,000 paid in one year is worth more than $10,000 paid immediately
the time value of money means that the $10,000 paid in one year is worth less than $10,000 paid immediately
the original capital budgeting cash flows assumed tax is payable at the end of each period and those cash flows should be followed as closely as possible
the original capital budgeting cash flows assumed tax is payable at the beginning of each period and those cash flows should be followed as closely as possible
3 of 4IBX Pty Ltd is considering the purchase of a new machine that is expected to save the company $85,000 at the end of each year in reduced wages.
The machine costs $247,000, plus another $11,000 to be installed. It is expected to last for five years after which it can be sold as scrap for $49,000. Operating expenses (such as fuel and maintenance) are $7,000 pa.
a)Determine the annual net cash flows of this investment (ignore the effect of taxes). Enter the information in the following table. Indicate whether cash flows are + or -:
| Time | 0 | 1 | 2 | 3 | 4 | 5 |
| NetCashFlow |
b)Calculate the NPV if the required rate of return is 17% pa. Give your answer in dollars and cents to the nearest cent.
NPV
17% = $
c)Calculate the NPV if the required rate of return is 19% pa. Give your answer in dollars and cents to the nearest cent.
NPV
19% = $
4 of 4A company that analyses projects based on after tax cash flows is considering investing in a project. Accepting this project will cause an increase in the company's expected level of income tax deductions. This additional tax deduction:
| only affects accounting profits and not cash flows which means it will not affect the capital budgeting decision |
| only affects cash flows and not accounting profits which means it will not affect the capital budgeting decision |
| must be taken into account when analysing the project as a reduction in cash inflows |
| must be taken into account when analysing the project as a reduction in cash outflows |