AMS is debating the purchase of a new digital scanner. The scanner they acquired 3 years ago for $800,000 is worth $320,000 today and will have a salvage value of $105,000 after 5 more years. The scanner generates revenues of $300,000 per year. The costs of operating the scanner are $130,000 per year. The company currently has $50,000 invested in operating net working capital. The new scanner will cost $985,000. The new scanner will generate revenues of $415,000 per year. In addition, the costs of operating the new scanner will be $125,000 per year. The new scanner will allow the company to reduce its investment in operating net working capital to $15,000. At the end of 5 years, the new machine will have a salvage value of $220,000. The company’s corporate tax rate is 35%, the CCA rate is 30% and the required rate of return is 11%. Assume the asset class remains open. Using net present value (NPV) calculation, determine if the company should purchase the new scanner. Show all work. Use the format given to answer the question.
AMS is debating the purchase of a new digital scanner. The scanner they acquired 3 years ago for $800,000 is worth $320,000 today and will have a salvage value of $105,000 after 5 more years. The scanner generates revenues of $300,000 per year. The costs of operating the scanner are $130,000 per year. The company currently has $50,000 invested in operating net working capital. The new scanner will cost $985,000. The new scanner will generate revenues of $415,000 per year. In addition, the costs of operating the new scanner will be $125,000 per year. The new scanner will allow the company to reduce its investment in operating net working capital to $15,000. At the end of 5 years, the new machine will have a salvage value of $220,000. The company’s corporate tax rate is 35%, the CCA rate is 30% and the required rate of return is 11%. Assume the asset class remains open. Using net present value (NPV) calculation, determine if the company should purchase the new scanner. Show all work. Use the format given to answer the question.
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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AMS is debating the purchase of a new digital scanner. The scanner they acquired 3 years ago for $800,000 is worth $320,000 today and will have a salvage value of $105,000 after 5 more years. The scanner generates revenues of $300,000 per year. The costs of operating the scanner are $130,000 per year. The company currently has $50,000 invested in operating net working capital. The new scanner will cost $985,000. The new scanner will generate revenues of $415,000 per year. In addition, the costs of operating the new scanner will be $125,000 per year. The new scanner will allow the company to reduce its investment in operating net working capital to $15,000. At the end of 5 years, the new machine will have a salvage value of $220,000. The company’s corporate tax rate is 35%, the CCA rate is 30% and the required Use the format given to answer the question. |
Transcribed Image Text:Inputs
Machine A
Machine B
Capital Cost
Project Life
Salvage Value
800,000
985,000
8
220000
Sales
300,000
415,000
Costs
130,000
125,000
Tax Rate
35%
35%
CCA Rate
30%
30%
Rate of Return
11%
11%
Net Working Capital
CCA Table for Machine A
50000
15000
CCA Table for Machine B
UCC beg
ССА
UCC end
UCC beg
ССА
UCC end
1
800,000
120000
680,000
1
985,000
147750
837,250
2
680,000
204000
476,000
837,250
251175
586,075
3
476,000
142800
333,200
3
586,075
175822.5
410,253
4
333,200
99960
233,240
4
410,253
123075.75
287,177
163,268
114,288
233,240
69972
5
287,177
86153.025
201,024
6
163,268
48980.4
114,288
34286.28
80,001
8
80,001
24000.396
56,001
Pro-forma IS for Machine A
Pro-forma IS for Machine B
1
2
3
4
5
6
7
8
3
4
S
300,000
300,000
300,000
300,000
300,000
300,000
300,000
300,000
415,000
415,000
415,000
415,000
415,000
C
130,000
130,000
130,000
130,000
130,000
130,000
130,000
130,000
125,000
125,000
125,000
125,000
125,000
D
120000
204000
142800
99960
69972
48980.4
34286.28 24000.396
147750
251175
175822.5
123075.75
86153.025
ЕBIT
50,000
-34,000
27,200
70,040
100,028
121,020
135,714
146,000
ЕBIT
142,250
38,825
114,178
166,924
203,847
Тахes
17,500
-11,900
9,520
24,514
35,010
42,357
47,500
51,100
Тахes
49,788
13,589
39,962
58,423
71,346
NOPAT
32,500
-22,100
17,680
45,526
65,018
78,663
88,214
94,900
NOPAT
92,463
25,236
74,215
108,501
132,501
Adjustment for UCC-S
14341.7
Adjustment for UCC-S
-56341.46341
OCF
152,500
181,900
160,480
145,486
134,990
127,643
122,500
133,242
OCF
240,213
276,411
250,038
231,577
162,312
1
2
3
5
6
7
8
1
2
3
Capital Spending
-800,000
Capital Spending
-985,000
NWC
50,000
50,000
50,000
50,000
50000
50,000
50,000
50,000
50,000
NWC
15,000
30,000
45,000
50,000
Change in NWC
-50,000
Change in NWC
-15,000
-15,000
-15,000
45,000
1
2
3
4
5
6.
7
8
1
2
3
FCF
-850,000
152,500
181,900
160,480
145,486
134,990
127,643
122,500
133,242
FCF
-985,000
225,213
261,411
235,038
276,577
162,312
NPV
-86,627.00
NPV
-119,567.11
32,940.11
It is better to keep the old scanner.
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