Reference no: EM132603747

Question - Powell Corporation, a large manufacturer of aircraft components, is trying to determine whether to to replace its existing 1,000-ton hydraulic steel press with a new computerised press. Powell's CEO and Chief Engineer recently travelled to see a demo of the new press its manufacturer's headquarters in Germany, with the trip costing the company $15,000 in flights and accomodation. The price of the new press is $380,000, but the manufacturer has offered to finance the purchase, so that Powell would pay for the machine in five equal annual instalments, based on an interest rate of 7.5% per annum. It will cost Powell $30,000 to transport the new press from Germany and install it in its factory. The tax office has ruled that the transport and installation cost is tax deductible at the time of payment. It has also ruled that the new press may be depreciated over 10 years for tax purposes. Powell's existing press has a book value of $50,000. However, it has located a buyer who is willing to pay $150,000 for the machine and will relocate it at their own expense. If Powell decides to replace its existing press with the new German machine, it will have to send the two technicians who operate its press on a training course in Germany. The cost of this training will be $10,000 per person (including flights, accommodation and other expenses), but it will be tax deductible at the time of payment. Given that the technicians' workload will increase if they operate the new press, Powell will have to increase their salaries by $20,000 per annum each. The main advantage of the new press is that it will allow Powell to fabricate certain aluminium wing panels for some large commercial jet aircraft. This will increase the firm's annual revenues by $250,000. However, the annual running costs of the new press will exceed those of the current machine by $50,000. Moreover, new products produced by the new press will require a $100,000 increase in Powell's inventory. Powell estimates that it will be able to produce the aluminium wing panels for its airline customers for about five years, after which it is likely that they will have replaced their fleet with new aircraft made from carbon fibre composites. It is estimated that the new press will have a resale value of about $200,000 at that time. Answer the following questions, given that Powell uses a discount rate of 15% for capital budgeting decisions of this nature and its tax rate is 30%.

Required -

(a) Calculate the cash flows at the beginning of the project.

(b) Calculate the recurring cash flows during the life of the project.

(c) Calculate the cash flows at the end of the project.

(d) Should Powell Corporation invest in the new machine?