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Capital Budgeting and Budget Analysis

Beautifully Fabulous Beauty Salon manufactures two products, Beauty Gloss and Cocooning Spray. Beauty Gloss is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Cocooning Spray. Beauty Gloss is produced on an automated production line. Due to the forecast of economic growth, the BFBS is considering purchasing a new machine costing $40,000. The machine will have 10 years of useful life and a salvage value of $6,000. Using the straight-line depreciation method, the original machine cost will be depreciated over 10 years not considering the salvage value in the calculation of the depreciation. The new machine will generate $15,000 in annual net cash flows throughout its useful life (ordinary annuity). To maintain the machine it will require additional working capital of $3,000, which would be released at the end of the useful life. The company's tax rate is 40% and its discount rate is 10%. Present value tables can be accessed at the following link: http://highered.mcgraw-hill.com/sites/0072994029/student_view0/present_and_future_value_tables.html

The following items will be assessed in particular:
1. Using the table BFBS Cost Analysis format, analyze the data and discuss the decision that should be made concerning the investment in the new machine..
As an example, review the spreadsheet below:
Cash Tax Effect After-Tax 11% PV of
Description Year(s) Flow 30% Cash flows Factor Cash Flow
New machine cost Now ($500,000) -500,000 1 ($500,000)
Controls and software Now -80,000 -80,000 1 -80,000
Salvage of old machine Now 12,000 0.7 8,400 1 8,400
New annual cost savings 1 to 12 78,500 0.7 54,950 6.4924 356,755
Depreciation tax shield 1 to 12 -45,000 0.3 -13,500 6.4924 -87647.4
Salvage value of machine 12 20,000 0.7 14,000 0.2858 4,002
Net present value ($298,490.40)

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Solution Summary

Computations and discussion attached. I put the rules for finding the factors in memos for the cells (put mouse over cell and it will pop up).