Carlton Co plans to buy a new machine. The cost of the machine, payable immediately, is $800,000 and the machine has an expected life of five years (straight line). Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit. Incremental fixed costs arising from the operation of the machine will be $160,000 per year. The production and sales are expected to increase by 2% per annum. It is also expected that selling price inflation will be 5% per year, variable cost inflation will be 5% per year and fixed cost inflation will be 3% per year Carlton Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Tax-allowable depreciation should be ignored. Calculate the Net Present Value of Carlton Co.
Carlton Co plans to buy a new machine. The cost of the machine, payable immediately, is $800,000 and the machine has an expected life of five years (straight line). Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit. Incremental fixed costs arising from the operation of the machine will be $160,000 per year. The production and sales are expected to increase by 2% per annum. It is also expected that selling price inflation will be 5% per year, variable cost inflation will be 5% per year and fixed cost inflation will be 3% per year Carlton Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Tax-allowable depreciation should be ignored. Calculate the Net Present Value of Carlton Co.
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 21P
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Transcribed Image Text:Carlton Co plans to buy a new machine. The cost of the machine, payable immediately, is
$800,000 and the machine has an expected life of five years (straight line). Additional
investment in working capital of $90,000 will be required at the start of the first year of
operation. At the end of five years, the machine will be sold for scrap, with the scrap value
expected to be 5% of the initial purchase cost of the machine. The machine will not be
replaced.
Production and sales from the new machine are expected to be 100,000 units per year.
Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit.
Incremental fixed costs arising from the operation of the machine will be $160,000 per year.
The production and sales are expected to increase by 2% per annum. It is also expected
that selling price inflation will be 5% per year, variable cost inflation will be 5% per year and
fixed cost inflation will be 3% per year
Carlton Co has an after-tax cost of capital of 11% which it uses as a discount rate in
investment appraisal. The company pays profit tax one year in arrears at an annual rate of
30% per year. Tax-allowable depreciation should be ignored.
Calculate the Net Present Value of Carlton Co.
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