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Question Last year, Bryce Canola Ol Company paid a consultant $12,000 to conduct an analysis on...

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Question Last year, Bryce Canola Ol Company paid a consultant $12,000 to conduct an analysis on how to improve its operations

Question Last year, Bryce Canola Oil Company paid a consultant $12,000 to conduct an analysis on how to improve its operation
Question Last year, Bryce Canola Ol Company paid a consultant $12,000 to conduct an analysis on how to improve its operations. One outcome of this resulted in a recommendation by the consultant to consider the replacement of its operating equipment The company now plans to replace its old harvester machine with a new one, to speed up its production process. The machine will cost the company $1 million, Inclusive of delivery and set-up charges. The machine can be depreciated on a straight-line basis over five years. This capital expenditure qualifies for the recently announced 4% investment allowance for agribusiness, by the Federal Government. of the company proceeds with the replacement, the old harvester machine will be sold today, for $180,000. It hasn't been fully deprecated, and currently has a book value of $200.000, The new harvester will speed up production in the canola folde by 50%, and the company expects revenues to increase from $1.2 million per year to $2,1 million per year. However, expanded production will noroese operating costs by $440,000 each year. The new harvester will have to be insured at an additional cost of $25.000 per year, where insurance premiums are paid at the start of each year, At the end of five years, the company expects to sell the new harvester for a salvage value of $290,000 The company wil incur a new bank loan to fund this purchase and the lender has indicated an interest rate of 75% pa. The company's tax rate in 30%. The firm typically applies an after tax required rate of return based on its WACC for routine equipment replacement proposals. This rate will be opa, considering the impact of the new bank loan. The company also typically prefers projects that take less than 2 years to recover the initial investment. Tasks • Bet up a table of incremental cash flows over the useful life of this machine 15 mars Calculate the Net Present Value (NPV), Internal Rate of Return (IRR), the Profitability Index Po and the Payback period for this investment proposal 12 mars
Question Last year, Bryce Canola Oil Company paid a consultant $12,000 to conduct an analysis on how to improve its operations. One outcome of this, resulted in a recommendation by the consultant, to consider the replacement of its operating equipment. The company now plans to replace its old harvester machine with a new one, to speed up its production process. The machine will cost the company $1 milion, inclusive of delivery and set-up charges. The machine can be depreciated on a straight-line basis over five years. This capital expenditure qualifies for the recently announced 4% Investment allowance for agribusiness, by the Federal Government If the company proceeds with the replacement, the old harvester machine will be sold today, for $180,000. It hasn't been fully deprecated, and currently has a book value of $200,000 The new harvester will speed up production in the canola fieldo by 50%, and the company expects revenues to increase from $1.2 million per year to $2.1 milion per year. However, expanded production will increase operating costs by $440,000 each year. The new harvester will have to be insured at an additional cost of $25,000 per year, where insurance premiums are paid at the start of each year. At the end of five years, the company expects to sell the new harvester for a salvage value of $200,000, The company will incur a new bank loan to fund this purchase and the lender has indicated an interest rate of 7.5% pa. The company's tax rate is 30%. The firm typically applies an after tax required rate of return based on its WACC for routine equipment replacement proposals. This rate will be 9% p.a., considering the impact of the new bank loan. The company also typically prefers projects that take less than 2 years to recover the initial investment Tasks • Set up a table of incremental cash flows over the useful life of this machine (6 marks) • Calculate the Net Present Value (NPV), Internal Rate of Return (IRR), the Profitability Index (PI) and the Payback Period for this investment proposal. (2 marks)

Answers

PROJECT = NEW MACHINE YEAR O YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 TERMINAL (1,000,000) 290,000 cost of new machine salvage valuNPV IRR MIRR PI payback period in no of years discounted payback period in no of years 737,703 37% 21% 90% 2.2% 2.6% discount

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