Initial Cash Outlay Assignment

Metal Works Inc makes a wide variety of heavy duty metal ornaments that are highly sort after in the home gardens. The company has done very well in recent years, and has just committed to paying out a $2 dividend on each of their outstanding 50,000 shares. Building on recent success the company is considering diversifying into the production of lighter and more delicate ornaments for inside the home, however the company recognises that to do so will require the purchase of new machinery. Prior to making such a big commitment to pursue this new market they spent $90,000 on consultants whose considered opinion is that there is likely to be strong market demand for the company’s new product. The consultants believe that the additional machinery would cost the firm $750,000 and likely require an increase of $65,000 in raw materials held on site. These additional materials would be required during the operating life of the machinery. Further, they estimated pre-tax cash-flows of $220,000 per year and a likely salvage value of $280,000 when the asset is sold in 8 years. The company has a cost of capital of 12% and a tax rate of 30%. For any depreciation use a CCA rate 30% and assume the asset class will remain open and is well-funded (thus salvage value

a) What is the initial cash outlay at t=0 ?

b) After one year what value will the asset have depreciated to under the CCA rules?

c) What is the ending cash flow at time t=8?

d) What is the NPV of the project? Should the company accept or reject this project? Get Finance homework help today

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