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Group Assignment 1
VALUE
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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
Labor Savings: 10% reduction in costs (Matrix 750 ($30/hour * 35 hours * 50 weeks) -
considered for the cash flow analysis. Also in year 3, the machine requires additional
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
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
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
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
Maintenance and Miscellaneous costs: Using an old machine could be expensive for
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