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A firm is considering the purchase of a new computer that is expected to produce annual net savings in labour costs of £8000 in each of the 6 years of its operational life.
The computer has an initial cost of £30000, and annual maintenance costs of £1000. All savings and maintenance costs accrue at the end of each relevant year.
The company has access to funds at the current market interest rate of 14% per annum, compounded annually, and wishes to decide whether the purchase of the computer is a worthwhile investment.
(a) By calculating the NPV of the proposed expenditure decide whether the computer should be purchased.
(b) If the market rate of interest fell to 8.5% per annum would the decision reached in (a) above be altered?
(c) In an attempt to finalize the sale, the computer salesperson offers the firm a ‘trade-in' after 6 years, the terms of which guarantee a £7500 reduction in the price of a replacement computer. Would such an offer alter the decision reached in (a) above (i.e. at the 14% interest rate)?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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