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Downside company considering investing in new production equipment. The equipment has an expected life of 5 years. Sales revenues from products that will produce the equipment is expected to be $ 15 million each year, and it assumed that they be paid at the end of each year. Operating costs, excluding depreciation, which is also expected to be paid by the end of each year, starting at $ 8 million in year 1 and will rise by $ 1 million per year. The investment in equipment made at the beginning of the year 1 and the investment amount is 15 million $. The equipment depreciated over the life of an estimated scrap value of zero $. You should ignore taxes. Downside company operates with a discount rate of 12% per year.

a)Estimate financial results for each of the five years

b)What is the present value of the investment project, and should investment project be start-up?

c)Assume that the machine is sold for $ 2 million at the end of 5 years. What effect will it have on the accounting result in years 1 to 5? and what is the effect on the present value consider on investments time?

d)Instead of buying all new equipment, considering the company to use a machine they already have.
The use of this machine stopped for 2 months ago in connection with the Downside company let down the production of a product that is not achieved sufficient profitability. The machine is not in use. Downside company has not apply for the machine in different production context.
The machine was purchased in a few years ago for $ 1 200 000. The carrying value at the time that the use of the machine stopped, was $ 600 000. The estimated selling price is $ 700 000.
What value should machine enter in investment costing with and why?

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Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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