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A company is studying the feasibility of acquiring a new machine. This machine will
cost R350, 000 and have a useful life of three years after which it will have no
salvage value. It is estimated that the machine will generate operating revenues of
R240, 000 and incur R75, 000 in annual operating expenses over the useful life of
three years. The project requires an initial investment of R15, 000 in working capital
which will be recovered at the end of the three years. The firm’s cost of capital is
16%.
You are required to use the NPV method to determine if the company should acquire
the machine. You may ignore depreciation and tax. Answer all the questions.
What is the initial investment? (1)
b) What is the initial Net Working Capital?
c) What is the annual operating cash flow?
d) What discount rate will you use?
e) What is the discount factor for years 1 to 3 of operation?
Give the factor to four decimal places.
f) What is the salvage value at the end of the third year?
g) What is the present value of the cash flows in Year 0?
h) What is the present value of the cash flows in Year 1?
i) What is the present value of the cash flows in Year 2?
j) What is the present value of the cash flows in Year 3?
k) What is the net present value of the project?
l) Should the company acquire the machine?
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