FINA2001 - Undiscounted Cash Flows and Corporate Finance - Accounting and Finance Assignment Help

Assignment Task

Question 1 Rough Jobs Pty Ltd is a manufacturing business based in Tasmania. Their company tax rate is 30%. It is considering the replacement of a manually operated machine with a fully automated model. Currently 6 full-time operators are needed to operate the machine. This labour costs the company $320,000 p.a. in wages, holiday pay and compulsory superannuation payments. In addition, maintenance costs of the machine are $32,000 per year. The current disposal value of the machine presently in use is $50,000. The machine was bought 4 years ago for $200,000. The Australian Tax Office schedule includes the asset in the 12-year useful-life category and only allows prime cost depreciation for this asset. The company believed that the machine normally would be taken out of service at the 12-year point. Note that prime cost depreciation is straight-line depreciating without the use of a residual in the calculation. The new model has a purchase price of $570,000. It is estimated that shipping and installation would cost $30,000. Maintenance on the new machine would be $60,000 p.a. but the adoption of that machine would cut the cost of defects from $20,000 to $4,000 per year. The Australian Tax Office schedule includes the new asset in the 8-year useful-life category and only allows prime cost depreciation for the asset. As the machine will undergo heavy use, the company believes the 8 years may be quite accurate. The company expects the manufacturing business will close down after 8 years of operation of the new machine and that the machine will have no re-sale value at that point. The required rate of return for projects of this risk level is 10%.

Required:

a. Determine the undiscounted cash flows associated with this replacement project. You are to compete all your workings on an Excel spreadsheet and submit that as part of this assessment 

b. Compute the NPV, IRR and Profitability Index of the project and advise if you would recommend the project and why. You are to compete all your workings on an Excel spreadsheet and submit that as part of this assessment

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