SingTel Ltd. is an Australian operated company with mainly Singaporean resident shareholders. The company is currently in the process of comparing two mutually exclusive machines for use in a new project with Machine A costing $30,000, having a useful life of five years and machine B costing $45,000 and having a useful life of 10 years. Cash inflows from sales are expected to be $22,000 p.a. from each machine, while total cashbased operating costs are expected to be $10,000 and $8,000 respectively for each machine. All revenues and costs are assumed to occur at the end of the respective years for simplicity of assessment. Machine A is expected to have a salvage value of $4,000 at the end of 5 years, while at the end of 10 years machine B will be worthless. Depreciation for accounting and tax purposes is calculated on a straight-line basis on the original cost of each machine with no consideration in depreciation calculations for any expected salvage value. The company has an aftertax required rate of return of 14% and pays income tax at the rate of 40% in the year following the year of income (that is, taxes levied on year 1 income are paid at the end of year 2). a) Provide some reasons as to why the alternative machines are said to be mutually exclusive for the company. b) Record the relevant cash-flows for each machine on a time (cash-flow) diagram. c) Advise the company which machine (if any), should be purchased and justify all the processes you have used in order to reach your decision. d) (i) Why is NPV considered to be the best method for capital budgeting? What does the NPV tell you? (ii) When evaluating two mutually exclusive projects with unequal lives, is the project with the higher NPV better? Why or why not?
SingTel Ltd. is an Australian operated company with mainly Singaporean resident shareholders. The company is currently in the process of comparing two mutually exclusive machines for use in a new project with Machine A costing $30,000, having a useful life of five years and machine B costing $45,000 and having a useful life of 10 years. Cash inflows from sales are expected to be $22,000 p.a. from each machine, while total cashbased operating costs are expected to be $10,000 and $8,000 respectively for each machine. All revenues and costs are assumed to occur at the end of the respective years for simplicity of assessment. Machine A is expected to have a salvage value of $4,000 at the end of 5 years, while at the end of 10 years machine B will be worthless. Depreciation for accounting and tax purposes is calculated on a straight-line basis on the original cost of each machine with no consideration in depreciation calculations for any expected salvage value. The company has an aftertax required rate of return of 14% and pays income tax at the rate of 40% in the year following the year of income (that is, taxes levied on year 1 income are paid at the end of year 2). a) Provide some reasons as to why the alternative machines are said to be mutually exclusive for the company. b) Record the relevant cash-flows for each machine on a time (cash-flow) diagram. c) Advise the company which machine (if any), should be purchased and justify all the processes you have used in order to reach your decision. d) (i) Why is NPV considered to be the best method for capital budgeting? What does the NPV tell you? (ii) When evaluating two mutually exclusive projects with unequal lives, is the project with the higher NPV better? Why or why not?
Related questions
Replacement analysis
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life.
A new machine can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $60,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life; so the applicable depreciation rates are 33%, 45%, 15%, and 7%.
The old machine can be sold today for $50,000. The firm's tax rate is 40%. The appropriate WACC is 9%.
If the new machine is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
$
What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| $ | $ | $ | $ | $ |
What is the NPV of this project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
$
Should Darlington replace the old machine?
