ABC Printing Corporation is considering purchasing a new printing machine. The following information relates to the proposed machine: The proposed machine will be disposed at the end of its usable life of four years at an estimated sale price of K800 000. The machine has an original purchase price of K8 000 000, installation cost of K500 000, and will be depreciated under the five-year WTA using the rates provided below. WTA Depreciation Schedule Year Depreciation Rate 1 25% 2 40% 3 15% 4 15% 5 5% The machine is expected to generate the following revenues and expenses: Year 2019 2020 2021 2022 Revenues КЗ 000 К6 000 K4 000 K2 000 000 000 000 000 Expenses (excluding K150 000 K200 000 K450 000 K250 000 depreciation, interest, taxes) This machine will require increases in cash ofK50 000, Accounts Receivable of K75 000, Inventories of K20 000, Accounts Payables of K30 000 and a Bank Overdraft facility of K30 000. At the end of the project, the firm is expected to recover K30 000 in working capital. The firm is subject to a 35 percent tax rate and a 10 percent cost of capital.
ABC Printing Corporation is considering purchasing a new printing machine. The following information relates to the proposed machine: The proposed machine will be disposed at the end of its usable life of four years at an estimated sale price of K800 000. The machine has an original purchase price of K8 000 000, installation cost of K500 000, and will be depreciated under the five-year WTA using the rates provided below. WTA Depreciation Schedule Year Depreciation Rate 1 25% 2 40% 3 15% 4 15% 5 5% The machine is expected to generate the following revenues and expenses: Year 2019 2020 2021 2022 Revenues КЗ 000 К6 000 K4 000 K2 000 000 000 000 000 Expenses (excluding K150 000 K200 000 K450 000 K250 000 depreciation, interest, taxes) This machine will require increases in cash ofK50 000, Accounts Receivable of K75 000, Inventories of K20 000, Accounts Payables of K30 000 and a Bank Overdraft facility of K30 000. At the end of the project, the firm is expected to recover K30 000 in working capital. The firm is subject to a 35 percent tax rate and a 10 percent cost of capital.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:CAPITAL BUDGETING: EXPANSION DECISION
ABC Printing Corporation is considering purchasing a new printing machine.
The following information relates to the proposed machine: The proposed
machine will be disposed at the end of its usable life of four years at an
estimated sale price of K800 000. The machine has an original purchase price
of K8 000 000, installation cost of K500 000, and will be depreciated under
the five-year WTA using the rates provided below.
WTA Depreciation Schedule
Year Depreciation Rate
1
25%
2
40%
3
15%
4
15%
5
5%
The machine is expected to generate the following revenues and expenses:
Year
2019
2020
2021
2022
Revenues
КЗ 000
К6 000
К4 000
K2 000
000
000
000
000
Expenses (excluding
K150 000
K200 000
K450 000
K250 000
depreciation, interest,
taxes)
This machine will require increases in cash ofK50 000, Accounts Receivable
of K75 000, Inventories of K20 000, Accounts Payables of K30 000 and a
Bank Overdraft facility of K30 000. At the end of the project, the firm is
expected to recover K30 000 in working capital. The firm is subject to a 35
percent tax rate and a 10 percent cost of capital.
Transcribed Image Text:Calculate the:
A. Depreciation Schedule of the machine for the years 2019 to 2022
B. Initial Investment of the machine
C. Operating Cash Flows of the machine
D. Terminal Cash Flow of the machine
E. Net Present Value of the project and provide a recommendation on
the viability of the project.
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