Investment evaluation with net present value

The objective of this assignment is to provide students with the opportunity to perform investment evaluation in practical application of capital budgeting concept, to identify relevant facts in performing qualitative and quantitative analysis, and to be able to apply quantitative reasoning, critical and creative thinking, and communication, and problem-solving skills.

Report Expectation:

You will be reading the case, research relevant facts, perform analysis, and document your findings, analysis, and recommendation in a written report to John Davidson to assist in the decision of whether to buy the new machine or maintaining the existing one.

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.

1• Using NPV analysis, should Magic Timber and Steel (Magic) purchase the new Delta finishing machine?

2• What other quantitative and/or qualitative factors (see below) need to be taken into consideration?

3• Sensitivity analysis (e.g., different discount rates, different selling prices, change in maintenance cost)

4• You may assume discount rate as 12% and tax rate as 30%.

Cash Flows:

Matrix:

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

Delta:

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

Non-Cash Flows:

Matrix:

1• Depreciation (given in case)

Delta:

1• Depreciation (10% per year of cost $130,000)

Tax Impact relevant Cash Flows:

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), Profit/Loss from Sale

Cash Flows for NPV:

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