Cash Flows for NPV

For this individual assignment, you will read the case, analyze it, and write a report to the owner, John Davidson, to present your recommendation on the business and investment decision. You may consider the following guided questions to prepare your report. If you have made assumption(s) as part of the case analysis, please include them in the report.

• Using NPV analysis, should Magic Timber and Steel (Magic) purchase the new Delta finishing machine?
• What other quantitative and/or qualitative factors need to be taken into consideration for the investment decision?
• Sensitivity analysis (e.g. different discount rate, different selling price, change in maintenance cost)
• What would be your recommendation(s)?
• You may assume the discount rate as 11% and tax rate as 30%.

What are the requirements?

• A typed report of not more than 4 pages (excluding appendix)

Cash Flows:

Matrix:

• Salvage value, Repair,      Maintenance, Scheduled service, Machine Sales

Delta:

• Machine investment, Labour      savings, Electricity savings, Maintenance, Salvage value, Profit/Loss from      sale

Non-Cash Flows:

Matrix:

• Depreciation (given in case)

Delta:

• Depreciation (10% per year of      cost $140,000)

Cash Flow from Tax Impact:

Which of the above cash flows and non-cash flows could impact the cash flow for tax saving/payment?

• Savings (+ taxable income),      Costs (- taxable income), Depreciation (Matrix, Delta)

Cash Flows for NPV:

Which of the above cash flows (including cash flows from tax impact) are relevant for purchase of Delta decision?

Solution: