Assignment# 4

Submitted By: Asad Ullah ID#: F2019273008

Question 1: We Dr.
Resource Person: areZaheer
now going to further explore some important aspects
Anwar of the
Section: G case study MAGIC TIMBER AN
1. Conduct the following sensitivity analyses:
a) ChangeCorporate
Subject: the discount rate to 12 per cent.
Finance Date: 01.May.2020
b) Change the Year 5 selling price of the Delta to $80,000.
c) Change the maintenance costs for the Delta: Year 1 costs are $1,000, increasing by $1,000 each year.
d) Change all of the above factors together.

Solution Calculatio

Year 0

Matrix Maintenance 28,000

Depreciation Matrix

Savings Labor

Savings Electricity

Delta Maintenance

Delta Depreciation

Gain on Sale of Delta

Taxable Income 28,000

Tax Payment 8,400

Cash F

Year 0

Sale of Matrix 35,000

Scrap Forgone

Maintenance Matrix 28,000

Cost of Delta (140,000)

Savings Labor

Savings Electricity

Maintenance Delta

Sales of Delta

Tax Payment (8,400)

Final Cash Flows (85,400)

Discount factor 1

Discounted Cash Flows (85,400)

NPV 3,386
8
study MAGIC TIMBER AND STEEL. Please prepare the answers of the following questions: -

0
000 each year.

Calculation of Tax

Year 1 Year 2 Year 3 Year 4 Year 5

7,000 7,000 11,000 7,000 7,000

6,000 6,000 6,000 6,000 6,000

5,250 5,500 5,750 6,000 6,250

4,725 4,800 4,875 4,950 5,025

(1,000) (2,000) (3,000) (4,000) (5,000)

(14,000) (14,000) (14,000) (14,000) (14,000)

10,000

7,975 7,300 10,625 5,950 15,275

2,393 2,190 3,188 1,785 4,583

Cash Flows

Year 1 Year 2 Year 3 Year 4 Year 5

 (5,000)

7,000 7,000 11,000 7,000 7,000

5,250 5,500 5,750 6,000 6,250

4,725 4,800 4,875 4,950 5,025

(1,000) (2,000) (3,000) (4,000) (5,000)

80,000

(2,393) (2,190) (3,188) (1,785) (4,583)

13,582 13,110 15,437 12,165 83,692

0.8929 0.7972 0.7118 0.6355 0.5674

12,127 10,451 10,988 7,731 47,489

Question 2: Based on your answers to questions in Assignment 1 and above question, write a 50
Answer:
Qualitative Analysis:
After the analysis of the case, doing assignments and calculations, I recommend David should go for buy
keeping the same machine Matrix 750 will need $63000 which is the breakdown as $28000 required imm
my opinion, it is not a good idea to invest such large amount on the machine which will not contribute to in
claim depreciation of $6000 every year and after 5 years it would be a scrap and would be sold for $5000
 
The major problem with the existing machine is safety issues. Its sensitive nature towards the angle of the
not correctly positioned and even only experts are allowed to use this machine. It is possible it can harm a
recommend Davidson take the necessary steps to train every employee or buy a new machine. But If we
The new machine Delta A390 also allows possibilities of some custom worked, which can later help to inc
than a regular item. 
 
Quantitative analysis:
In order to expelled Davidson's confusion about buying new machine Delta or stay with the existing mach
of Net Present Value (NPV), which shows the clear picture of all the inflows and outflows of the projects, a
select the project or not. As we can see the outcomes of assignment 3 NPV were negative but if we meas
better alternative. In assignment 4 as we have made some changes in the discount factor from 11% to 12
to $1,000 increasing by $1,000 each year, NPV turns out positive. Similarly, when we applied all the cond
positive which means that Davidson should go with the option of purchasing the new machine. 
 
After a detailed analysis of the above statements, we would highly recommend David should go for the ne
$63000 and $ 28000 required immediately for the repair, $7000 every 5 years, and the larger scheduled s
good idea to invest further such a huge amount on the existing machine which may not contribute to an in
$6000 per year and after 5 years, It would be a scrap and will be sold for only $5000.
 
The new machine also offers an increase in the capacity of 40 percent. New machinery will also help him
cost, which are $ 5250 (10 percent of $ 30 * 35 * 50 where 35 hours a week and 50 working weeks in a ye
day,7 days a week and 50 working weeks) respectively in the first year. Even this labor and electricity sav
Even the forecast Revenue and net profit indicate the continuous decline which will one day lead to the liq
market, decrease in population growth and infrastructural issues affect the overall business, but we shoul
one of the “Fastest Growing “regions which are undoubtedly a light of hope in this dark economic environ
 
To summarize: I believe that buying a new machine would prove to be a good decision and would help his
machine will also require a large amount of money and requires 7000 every year for repair. on the other h
increase in capability and provided the possibility of certain personalized works which also help to increas
standard ones. 
 ve question, write a 500-word report to Davidson to present your recommendation.

d David should go for buying a new machine Delta A390. As we have seen in the case,
as $28000 required immediately for repair, $7000 every 5 years for regular maintenance. In
ich will not contribute to increases in revenue in future, furthermore, the Matrix 750 will also
d would be sold for $5000.  

e towards the angle of the timber and its tendency to kick back severely increase lumber is
It is possible it can harm any labor when it gets old. To ensure employee safety, I strongly
a new machine. But If we see, the new machine offered an increase in capacity of 40 percent.
which can later help to increase sales, as we know customized work can generate more profit

ay with the existing machine Matrix. To make the decision easy for him, we used the method
outflows of the projects, and on the basis of NPV Davidson will be able to decide either to
e negative but if we measure the other factors too then it shows that the new machine is a
unt factor from 11% to 12%, the selling price of Delta to $80,000, and the maintenance cost
n we applied all the conditions mentioned in assignment 4, we saw that NPV value 3,386 is
new machine. 

David should go for the new machine. Because keeping the same machine will also require
nd the larger scheduled service in the third year which will cost around $4000. It is not a
may not contribute to an increase in revenue, the existing machine also claims depreciation of
5000.

chinery will also help him in ease of doing business and reduce the labor cost and electricity
50 working weeks in a year) and $ 4725 ( 10 percent of $ 5.625 * 24*7*50 where 24 hours a
s labor and electricity saving will increase each year by a fixed $ 250 and $ 75 respectively.
will one day lead to the liquidation of the Magic. There is no denying that the slow tourism
all business, but we should also consider the fact that Queensland Sunshine coast still remain
is dark economic environment.  

ecision and would help his company to stay solvent and survive in the market. the same
r for repair. on the other hand, in comparison, New machines will provide a 40 percent
which also help to increase sales as personalized products can produce more income than