The management has decided not to seell the old equipment. All the present value is YEAR 1 2 3 4 Discount rate (10%) 0.909 0.826 0.751 0.683 Determine the releevant after tax cash flows at each of the following three point i) project initiation (Year 0) ii) Project operation (Year 1-4) iii) Project disposal (termination, year 4) B) Based on the workings in (a) and using the NPV decision model, should the company buy the new oil field equipment? show calculation.
The management has decided not to seell the old equipment. All the present value is YEAR 1 2 3 4 Discount rate (10%) 0.909 0.826 0.751 0.683 Determine the releevant after tax cash flows at each of the following three point i) project initiation (Year 0) ii) Project operation (Year 1-4) iii) Project disposal (termination, year 4) B) Based on the workings in (a) and using the NPV decision model, should the company buy the new oil field equipment? show calculation.
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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The management has decided not to seell the old equipment. All the
| YEAR | 1 | 2 | 3 | 4 |
| Discount rate (10%) | 0.909 | 0.826 | 0.751 | 0.683 |
Determine the releevant after tax cash flows at each of the following three point
i) project initiation (Year 0)
ii) Project operation (Year 1-4)
iii) Project disposal (termination, year 4)
B) Based on the workings in (a) and using the
Transcribed Image Text:Part A
MMC Heavy Industries Sdn. Bhd. (MMC) uses oil field equipment for deep sea oil drilling.
MMC is considering replacing some of its existing oil field equipment now to increase its
drilling capacity and subsequent oil output.
The new equipment will reduce annual energy costs by RM50,000 and generate an annual
increase in contribution margin of RM40,000. Incremental cash operating costs per year is
RM20,000. This new equipment has expected useful life of 4 years.
The Chief Financial officer of MMC has prepared the following additional information and
assumptions to support the decision:
New oil field equipment
Purchase price
RM
140,000
10,000
10,000
4 years
10,000
15,000
New machine installation costs
New machine testing/adjustment costs
Expected useful life
Expected salvage value
End of life disposal value
Depreciation method is straight line method
Year 4 employee relocating expenses
First year employee training costs
Incremental net working capital investment,
payable now and fully recoverable at the end of
year 4.
Income tax rate
20,000
10,000
20,000
20%
Discount rate
10%
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