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ACCT 701-001

Group Assignment 1

MAGIC TIMBER AND STEEL: INVESTMENT EVALUATION WITH NET PRESENT

VALUE

Submitted to:

Prof. Cheryl Dyson

Submitted by:

Ashwin Rajaratnam 300989202

Madhukar Edpuganti 300989186

Melvynn Varghese 300992106

Michael Sheikh 300990410

Submitted on: 14th November 2018


MAGIC TIMBER AND STEEL: INVESTMENT EVALUATION WITH NET PRESENT VALUE

1. Compute the Net Present Value of purchasing the Delta finishing machine. Complete
this question using an excel spreadsheet. Be sure to show your detailed calculations including
any discount factors. Using the Net Present Value method, advise Davidson as to whether or
not Magic should purchase the new Delta finishing machine. While Davidson has not
calculated his own cost of capital, his colleague with a similar business about 200km away
advises that his cost of capital is 11 per cent.
Ans. Using the Net Present Value Method, the following are found:

 Electrical Savings: 10% reduction in costs (Matrix 750 ($5.625/hour * 24 hours * 7 days

* 50 weeks) - Delta A390 ($5.0625/hour * 24 hours * 7 days * 50 weeks).

 Labor Savings: 10% reduction in costs (Matrix 750 ($30/hour * 35 hours * 50 weeks) -

Delta A390 ($27/hour * 35 hours * 50 weeks).

 Maintenance Cost on Delta Delta A390: Increment of 1000 every year.

 Maintenance Cost on Matrix 750: On the year 0 , repair of existing machine is

considered for the cash flow analysis. Also in year 3, the machine requires additional

4000 for scheduled service.

 Loan Payment to the bank: Interest-only payment each year.

 Salvage values for both A390 and Matrix 750 considered at the end of year analysis.
MAGIC TIMBER AND STEEL: INVESTMENT EVALUATION WITH NET PRESENT VALUE

Recommendation: As the Net Present Value is positive and sums up to 35,349 buying a new

machine for the operation could be taken into consideration. In other words, the value of

revenue is greater than the costs.

2. Are there other factors that have not been taken into account in the NPV analysis that

might have an impact on your decision (i.e. quantitative or qualitative)? Identify these factors

and explain their relevance?

Ans. The other factors that weren’t a part of the NPV Analysis and that would have an impact on

the decision to be made for the Magic Timber and Steel would be the following:

Depreciation of the equipment: As the depreciation element doesn’t reduce the cash account

on the balance sheet and reduces the net income on the income statement, the depreciation

factor is not being considered for the NPV analysis.

Safety factor: The old machine is subjected to have lower safety as compared to a newer one.

The wear and tear of the machine could lead to have a impact on the laborers working on it.
MAGIC TIMBER AND STEEL: INVESTMENT EVALUATION WITH NET PRESENT VALUE

Efficiency: The productivity and efficiency of a machine degrades over the course of time

affecting the productivity.

Maintenance and Miscellaneous costs: Using an old machine could be expensive for

maintenance and for repair works.

Emissions from the old machine: As the efficiency of the old machine gets lower, the emission

of effluents and gas could cause a polluting environment for workers and for the management.

After the NPV Analysis we could conclude that, it would be the best solution to go with the New

Machine Matrix 750 instead of continuing the Delta A390.

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