XYZ Enterprise is considering an investment in a new packaging, which could reduce labour costs by 30%. XYZ Enterprise has an annual labour cost of $450,000. The new packaging would cost $725,000 and would replace the old machine that is currently used. The straight line depreciation rate for the new machine is 20% of the purchase price. The new machine would be used for 6 years, with an expected salvage value of $60,000 at the end of its useful life. XYZ Enterprise could obtain a long-term loan at the Canadian Bank and would pay approximately $10,000 interest per year. The old machine was acquired 2 years ago at a cost of $850,000 and is being depreciated over 8 years using the straight-line method. It was expected that after 8 years its salvage value would be zero, but it can be sold now for $212,500. The company ’s tax rate is 35% and its required before-tax return on all investments is 12%. A. Determine the initial investment on the new machine. B. Determine the annual cash flow on year 1.
XYZ Enterprise is considering an investment in a new packaging, which could reduce labour costs by 30%. XYZ Enterprise has an annual labour cost of $450,000. The new packaging would cost $725,000 and would replace the old machine that is currently used. The straight line
A. Determine the initial investment on the new machine.
B. Determine the annual cash flow on year 1.
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