Answered: Depreciable base SAR is A1. New…

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter2: The Accounting Information System

Section: Chapter Questions

Problem 64.1C

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Explansion Project:

ABC is planning to buy a new heavy duty printing machine. You were hired to assist KFUPM on this decision. So you gathered the following information. The new machine has a life of 3 years.

New Machine:

Life of machine: 3 years

The cost of the new machine is SAR 1,134

The machine will increase the gross profit every year by SAR 314

The market value of the machine when sold at the end of its life is SAR 191

If replaced, then the net working capital (NOWC) will increase every year by SAR 22

ABC will recover all investments in working capital at the end of the new machine's life (after 3 years).

WACC is

9.49%

Tax rate is 40%

ABC uses straight-line Depreciation.

Calculate the follwoing:

Notes:

1. Use 2 Decimals

Depreciable base SAR is
A1. New Machine:
Yearo
Year1
Year2
Year3
NOPAT + Dep.
A2. Cash Flows from Working Captial (WC):
Yearo
Year1
Year2
Year3
(-) change in NOWC*
*make sure to put the correct sign
A3. Cash Flows from the Initial Outlay (10):
Yearo
(-) 1O*
*make sure to put the correct sign

A3. Cash Flows from the Initial Outlay (I0):
Yearo
X
X
(-) 1O*
*make sure to put the correct sign
A4. Cash Flows from Terminal Cash Flows (TCF):
X
X
Year3
TCF*
X
*make sure to put the correct sign
A5. Free Cash Flows:
Yearo
Year1
Year2
Year3
FCF*
*The sum of A1-A4
D. NPV =

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