Magic Timber and Steel: Investment Evaluation with Net Present Value
1. Using NPV analysis, determine whether or not Magic should purchase the new Delta finishing machine. The company tax rate applicable to Magic is 30 percent. While Davidson has not calculated his own cost of capital, his colleague with a similar business about 200 km away advises that his cost of capital is 11 percent. Complete the question in a spreadsheet. This approach will be especially useful when answering question 3.
2. Are there other quantitative and/or qualitative factors that have not been taken into account in the NPV analysis that might have an impact of your decision? Would any of these factors change your answer to question 1?
3. Conduct the following sensitivity analyses: • Change the discount rate to 12 percent • Change the Year 5 selling price of the Delta to $80,000 (AU$) • Change the maintenance costs for the Delta: Year 1 costs are $1,000, increasing by $1,000 each year • Change all the above factors together
4. Based on your answers to question 1, 2, and 3, write a word report to Davidson to present your analysis and recommendations. You can attach your work for questions 1, 2, and 3 in appendices and refer to them in your report.
