SKR Inc. is considering the purchase of a new leather-cutting machine to replace an existing machine that has a book value of $5000 and can be sold for $ 1,500. The old machine is being depreciated as written down value method basis. The WDV rate is 20%. The old machine’s estimated salvage value 5 years from now is $0. The new machine will reduce fixed costs (before taxes) by $10,000 per year. The new machine will improve quality, thus increasing our leather sales from $25,000 to $35,000 per year. Variable costs are 45% of sales. The new machine has a 5-years life, it costs $20,200 and it can be sold for an expected $3,500 at the end of the third year. Because of the new sales, we will increase our inventory by $4,000, our accounts receivable by $500. The tax accountant has told SKR Inc that the new machine would also be depreciated using written down value method at 20%. Assume a 30% tax rate (corporate as well as capital gain) and a cost of capital of 15 per cent. You are required to answer the questions given below.What is the initial cash outflow?What are the total cash flows?What is the terminal cash flow?What are the NPV and or IRR of the project?

Computation of Initial cash outflow: Particulars Amount Cost of a new machine $20200…

Answered: SKR Inc. is considering the purchase of…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 18P: Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting...

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SKR Inc. is considering the purchase of a new leather-cutting machine to replace an existing machine that has a book value of $5000 and can be sold for $ 1,500. The old machine is being depreciated as written down value method basis. The WDV rate is 20%. The old machine’s estimated salvage value 5 years from now is $0. The new machine will reduce fixed costs (before taxes) by $10,000 per year. The new machine will improve quality, thus increasing our leather sales from $25,000 to $35,000 per year. Variable costs are 45% of sales. The new machine has a 5-years life, it costs $20,200 and it can be sold for an expected $3,500 at the end of the third year. Because of the new sales, we will increase our inventory by $4,000, our accounts receivable by $500. The tax accountant has told SKR Inc that the new machine would also be depreciated using written down value method at 20%. Assume a 30% tax rate (corporate as well as capital gain) and a cost of capital of 15 per cent. You are required to answer the questions given below.

What is the initial cash outflow?
What are the total cash flows?
What is the terminal cash flow?
What are the NPV and or IRR of the project?

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