Any
idea how to get the discount factor for the decimal? In
red-highlighted. thanks.
Marsh Limited is
considering investing in a new machine. The machine would
cost $500,000. It would have a life time of five (5) years
and a Zero / Nil (0) residual value. The company used the
straight-line method of depreciation.
It is expected that the machine will earn the
following extra profit for the company during its expected
life:
Years
Profits
($)
1
120,000
2
180,000
3
200,000
4
250,000
5
300,000
The above
profits also represent the extra new cash flow expected to be
generated by the machine (i.e. they exclude the machine’s initial
cost and the annual depreciation charges). The company’s cost
of capital is 18%.
Required:
<!--[if !supportLists]-->(a)
<!--[endif]-->Calculate
<!--[if !supportLists]-->i)
<!--[endif]-->The machine’s payback period;
&
<!--[if !supportLists]-->ii)
<!--[endif]-->Its net present
value.
<!--[if
!supportLists]-->(b)
<!--[endif]-->Advise
the management as to whether the new machine should be
purchased.
Answer:
Year / Cashflow /Cumulative cashflow / Discount Factor
0. (500,000) /
(500,000) / 1.0000
(500,000)
1.
120,000 /380,000
/ 0.8475101,695
2. 180,000 /
(200,000)
/ 0.7182
129,273
3.
200,000 /- / 0.6086
121,726
4.
250,000 /
250,000
/ 0.5158
128,947
5.
300,000 /
550,000
/ 0.4371
131,133
Payback is 3 years
