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A machine has a cost of RM180,000
A machine has a cost of RM180,000. It will have a life of 3 years, and will be depreciated straight line to zero salvage value. It will result in sales revenue of RM200,000 per year and cash operating costs of RM110,000 per year. Use of the machine will require an increase in working capital of RM70,000 for the 3 years, beginning at year 0. The appropriate discount rate is 8% and the firm's tax rate is 40%.
i. Calculate the initial cash flow at time 0.
ii. Calculate the annual operating cash flows (they are identical each year).
iii. Calculate the relevant terminal cash flows at the end of year 3.
iv. What is the NPV for the machine?
Expert Solution
i). Initial cash flow at time 0 = -250,000
ii). Annual operating cash flow (For each year) = 78,000
iii). Relevant terminal cash flows at the end of year 3 = 70,000 (Working capital)
iv). NPV for the machine = 6,581.82
Since, the NPV is positive so the machine should be purchased.
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