Engineering Company Pty. is considering a proposal to purchase an additional spray machine for its repair shop.

Engineering Company Pty. Ltd. is considering a proposal to purchase an additional spray machine for its repair shop. The finance officer of the company has gathered the following data/ information relevant to the machine.

·     Purchase and Installation cost of the machine $ 120,000

·     Useful life of the machine 5 Years

·     Estimated salvage value at the end of 5 years $ 5,000

·     Net cash inflow that will be generated by the machine from end of year 1 to the

end of year 5, before deducting depreciation and income tax, is estimated at $ 40,000 per year.

·     Although the machine will have a useful life of 5 years, the Tax Department will

allow the company to fully depreciate the machine in 4 years. To take advantage of this tax rule, the company will depreciate the machine in full over the first 4 years, ignoring the estimated salvage value.

·     The new spray machine will require an incremental investment in working

capital of $10,000. This will be fully recovered at the end of the machine's working life.

·     The applicable tax rate for the Engineering Company is 30% and the after-tax required rate of return (cost of capital) is 10%.

You are required to:

i)   Calculate the NPV[1] 

ii)    Make a recommendation based on the NPV

 [1]