Calculating after tax NPV for both options

Assignment Help Managerial Accounting

Reference no: EM132767552

Question - With the vision to expand market to New South Wales in near future, the headquarter of QV wants to increase SW's capacity to at least double the current level. There are two proposals coming from the factory manager:

(1) Keep the old machine, and purchase another machine of the same type, which has the same capacity as the old machine, 150,000 kg per year.

(2) Sell the old machine and purchase a new advanced machine, which has the capacity to produce 600,000kg per year. To purchase this advanced machine, which will cost $2 million, QV will need to spend $1.5 million out of their own fund, and the remainder will be funded by a 10-year external loan of $500,000 at 6% per year. Interest is to be paid yearly and principle to be paid off at the end of the loan term.

The manager, which has some accounting knowledge, has estimated the cash flows associated with two options in the below table. The increases in sale are estimated based on the additional production output under each option, and at current selling price. The increases in variable costs are based on the additional production output and standard variable cost per unit.

Forecasted cash flows	Option 1	Option 2
Cost of new machine	$500,000	$2,000,000
Sales of old machine netbook value of	$150,000	$100,000
Annual increase in sales	$2,500,000	$4,250,000
Annual increase in variable costs	$1,630,000	$2,716,667
Interest expense yearly	$0	$30,000
Paid off principle at the end of year 10	$0	$500,000
Expected sales of machines at the end of useful life	$10,000	$50,000
Tax rate:	30%	30%
Weighted average cost of capital:	6%	6%
Depreciation method: straight-line straight-line Useful life (years):	10	15

Required -

(a) Calculating after tax NPV for both options?

(b) Identify and explain other possible cash flows that might not be considered by the manager?

Reference no: EM132767552

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