Reference no: EM133014471

Question - The company is considering an investment into a brand new and more efficient machinery. The capital investment is estimated to be EUR 400000. This cost will be depreciated straight line to zero over the project's four year life, at the end of which the machinery can be sold for 22000EUR. The system will save 160000 per year in pre tax operating cost (eg excluding depreciation and taxes). Moreover the system requires an initial investment into working capital that is 22000EUR. However, we can expect to recover this investment when the project ends. The company's tax rate is 40% and the company's cost of capital is 8%. The company has already spent 20000 on project related market research.

Required -

1. Estimate the total cash outflow when project starts (t=0).

2. Estimate the total after tax cash outflow when project starts (t=0).

3. Estimate the operating cash flow (OCF) of the first year and assume that this stays the same for the remaining years.

4. Estimate the terminal cash flow (including the after tax value of the machinery and recovered working capital).

5. Compute NPV and explain if the company should make this investment or not.