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Question:

A firm wants to buy a new machine and the following quotation has been received.

Cost of machine US$100 000
Freight and insurance US$5 000

The new machine will last for five years and has a salvage value of Z$80 000. If the new machine is bought the firm will dismantle an old machine at a cost of Z$20 000. The old machine for which 100% SIA has been claimed can be sold today for Z$50 000. The old machine can still last for five more years and will result in a cost of Z$100 000 per annum.

The new machine will result in the firm incurring costs of Z$150 000 per annum. Current production is 100 000 units per annum which will increase to 120 000 units with the new machine. The firm will be able to charge an extra Z$5 per unit over the above current price of Z$15 per unit.

Cost capital is 24%

Tax rate is 40%

Exchange rate: US$1= Z$13

Required:

a) Estimate the initial investment
b) Annual cash flows
c) Terminal value
d) Calculate: the NPV, IRR, PI, PBP

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