If the firm's cost of capital is 10%;- 1) Draw the cash flow forecast. 2) Evaluate the proposed investment using the following techniques; a) Payback b) Return on Investment
If the firm's cost of capital is 10%;- 1) Draw the cash flow forecast. 2) Evaluate the proposed investment using the following techniques; a) Payback b) Return on Investment
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 15P
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Transcribed Image Text:Question 1
Alpha Engineering Ltd. is considering the purchase of a new cnc.
machine tool to replace four old capstan lathes. The new machine will
cost £150,000 and is expected to last five years, after which it is expected
to realise a scrap value of £10,000.
Additional dedicated tooling for the new machine will cost a further
£25,000. A maintenance contract will be taken out to cover the machine
at a cost of £10,000 per annum. The maintenance of the additional
dedicated tooling will be done in-house at an estimated cost of £5,000 per
year. A cnc. programmer/operator will be recruited at a cost of £20,000
per year.
The benefits expected from the new cnc. machine will include the scrap
value of the old machines, which is expected to be £5,000 each. The
wages of four capstan operators of £17,000 per annum each plus the cost
of a maintenance fitter at £18,000 per annum can also be considered as a
benefit. A further saving of £10,000 per year in reduced scrap/rework
costs should also be realised.
If the firm's cost of capital is 10%;-
1) Draw the cash flow forecast.
2) Evaluate the proposed investment using the following techniques;
a) Payback
b) Return on Investment
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