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    Assignment# 3 Magic Timber

    Uploaded by

    ASAD ULLAH
    The document analyzes whether a company called Magic should purchase a new finishing machine called Delta based on a net present value analysis. Several additional factors are identified that were not included in the initial analysis that could impact the decision. These include effects of depreciation on taxes, needs for specialist labor, higher maintenance costs of the old machine, loan repayment amounts, and differences in productivity between old and new machines. Considering some of these additional factors, the answer to whether Magic should purchase the new machine may change from the initial analysis.

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    Assignment# 3 Magic Timber

    Uploaded by

    ASAD ULLAH
    1K views5 pages
    The document analyzes whether a company called Magic should purchase a new finishing machine called Delta based on a net present value analysis. Several additional factors are identified that were not included in the initial analysis that could impact the decision. These include effects of depreciation on taxes, needs for specialist labor, higher maintenance costs of the old machine, loan repayment amounts, and differences in productivity between old and new machines. Considering some of these additional factors, the answer to whether Magic should purchase the new machine may change from the initial analysis.

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    The document analyzes whether a company called Magic should purchase a new finishing machine called Delta based on a net present value analysis. Several additional factors are identified that were not included in the initial analysis that could impact the decision. These include effects of depreciation on taxes, needs for specialist labor, higher maintenance costs of the old machine, loan repayment amounts, and differences in productivity between old and new machines. Considering some of these additional factors, the answer to whether Magic should purchase the new machine may change from the initial analysis.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    1K views5 pages

    Assignment# 3 Magic Timber

    Uploaded by

    ASAD ULLAH
    The document analyzes whether a company called Magic should purchase a new finishing machine called Delta based on a net present value analysis. Several additional factors are identified that were not included in the initial analysis that could impact the decision. These include effects of depreciation on taxes, needs for specialist labor, higher maintenance costs of the old machine, loan repayment amounts, and differences in productivity between old and new machines. Considering some of these additional factors, the answer to whether Magic should purchase the new machine may change from the initial analysis.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    The document discusses whether a company should purchase a new machine based on a net present value (NPV) analysis. While the NPV analysis suggests purchasing the new machine is not favorable, there are other quantitative and qualitative factors that need to be considered in the decision making process.

    Factors that have not been considered include the effects of depreciation on taxes, need for a specialist operator, higher maintenance costs of the old machine, loan repayment amount, and lower productivity of the old machine.

    Yes, the higher repairing costs of the old machine and effects of depreciation could change the answer to question 1. Installing the new machine would reduce labor and electricity costs and provide benefits in the future through increased production capacity.

    Assignment# 3

    Resource person: Dr. Zaheer Anwer Submitted by: Asad Ullah ID# F2

    Question# 1 Using an NPV analysis, advise Davidson as to whether or not Magic should purchase the new Del
    capital, his colleague with a similar business about 200 kilometres away advises that his cost of capital is 11 pe

    Solution:

    Period Year 0 Year 1

    Sale of old Machine (Matrix) 35,000

    Scrap (Opportunity Cost)

    Maintenance (Matrix) 750 28,000 7,000

    Depreciation of Matrix (not charged) 6,000

    Cost of new machine (Delta) (140,000)

    Labor savings 5,250

    Electricity savings 4,725

    Maintenance (Delta) (2,000)

    Interest on Loan (8,400)

    Depreciation (Delta) (14,000)

    Sales proceeds of Delta

    Tax Savings (Payment) (8,400) 428

    Depreciation Reversal 8,000

    Total Cash Flows (85,400) 7,003

    Discount factor 1 0.90

    Discounted Cash Flows (85,400) 6,309

    NPV (26,182)
    ID# F2019273008

    hould purchase the new Delta finishing machine. The company tax rate applicable to Magic is 30 per cent. While Davidso
    at his cost of capital is 11 per cent. Complete this question in a spreadsheet.

    Year 2 Year 3 Year 4 Year 5

    (5,000)

    7,000 11,000 7,000 7,000

    6,000 6,000 6,000 6,000

    5,500 5,750 6,000 6,250

    4,800 4,875 4,950 5,025

    (3,000) (4,000) (5,000) (6,000)

    (8,400) (8,400) (8,400) (8,400)

    (14,000) (14,000) (14,000) (14,000)

    60,000

    630 (368) 1,035 4,238

    8,000 8,000 8,000 8,000

    6,530 8,858 5,585 63,113

    0.81 0.73 0.66 0.59

    5,300 6,477 3,679 37,454


    30 per cent. While Davidson has not calculated his own cost of
    Question# 2 (A): Are there other factors that have not been taken into account in t
    on your decision (i.e., quantitative and/or qualitative)? Identify these factors as bu
    explain their relevance.
    (B):Would any of these factors change your answer to question 1 ? Answer yes or n
    explain your decision.
    Asnwer:
    (A)
    The other factors which are not considered in NPV analysis can also have the impa
    factors:

    Effects Due To Depreciation:


    In the NPV analysis we have not considered the effects of depreciation which might als
    taxes are calculated after deducting the depreciation so, if we consider depreciation so t

    Wood Crafting Master:


    Keeping in view the safety features of the old machine we need a specialist wood crafte
    incident and this will have both quantitative and qualitative effect.

    Maintenance Cost of Machines:


    The maintenance cost of the old machine is higher as compared to the new machine bec
    this requires a good sum of maintenance to keep it operational so it will have quantitativ

    Payment of The Loan Amount:


    The principal amount of $140,000 is the loan amount which the company have to pay b
    NPV value so, this may also affect the decisions.

    Productivity:
    The old machinery is based on older technology so its productivity is lower as compare
    the company and this might also impact the decision making in positive way.

    (B)
    Yes, higher repairing cost of old machine and depreciation can affect our question 1. W
    installing new machine, we can reduced our labor and electricity cost, Also new machin
    future by producing more products.
    een taken into account in the NPV analysis that might have an impact
    dentify these factors as bullet points, along with a few sentences to

    uestion 1 ? Answer yes or no, and include three or four sentences to

    ysis can also have the impact on the decision due to the following

    epreciation which might also have an effect on the income taxes paid as the
    we consider depreciation so taxes paid will reduce.

    need a specialist wood crafter so that we can be saved from any uneven
    effect.

    ared to the new machine because it is being used for a longer time period so
    nal so it will have quantitative effect.

    h the company have to pay back but it is not considered while analyzing the

    uctivity is lower as compared to the new machinery so this will also impact
    g in positive way.

    can affect our question 1. We should go for buying new machine and by
    ricity cost, Also new machine has latest technology and it is benificial in the

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