Case 1 - Magic Timber

Tax Rate 30.0%

Cost of Capital 11.0%

Replace Mathix with Delta

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Tax Calculation
Matrix Maintenance (savings) $ 28,000 $ 7,000 $ 7,000 $ 11,000 $ 7,000 $ 7,000
Labour (savings) $ 5,250 $ 5,500 $ 5,750 $ 6,000 $ 6,250
Electricity (savings) $ 4,725 $ 4,800 $ 4,875 $ 4,950 $ 5,025
Matrix sell Depreciation $ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 6,000
Delta Regular Maintenance (cost) $ (2,000) $ (3,000) $ (4,000) $ (5,000) $ (6,000)
Delta Depreciation (cost) $ (14,000) $ (14,000) $ (14,000) $ (14,000) $ (14,000)
Taxable Income $ 28,000 $ 6,975 $ 6,300 $ 9,625 $ 4,950 $ 4,275
Tax Payable $ 8,400 $ 2,093 $ 1,890 $ 2,888 $ 1,485 $ 1,283

Cash Flow
Delta Cost "Outflows" $ (140,000)
Delta Maintenance "Outflows" $ (2,000) $ (3,000) $ (4,000) $ (5,000) $ (6,000)
Matrix Scrap forgone "Outflows" $ (5,000)
Tax Payable "Outflows" $ (8,400) $ (2,093) $ (1,890) $ (2,888) $ (1,485) $ (1,283)
Matrix Sale Price "Inflows" $ 35,000
Maintenance Matrix "Inflows" $ 28,000 $ 7,000 $ 7,000 $ 11,000 $ 7,000 $ 7,000
Labour savings "Inflows" $ 5,250 $ 5,500 $ 5,750 $ 6,000 $ 6,250
Electricity savings "Inflows" $ 4,725 $ 4,800 $ 4,875 $ 4,950 $ 5,025
Delta Sale Price "Inflows" $ 60,000

Total Cash Flow "Total Cash Flow" $ (85,400) $ 12,883 $ 12,410 $ 14,738 $ 11,465 $ 65,993

Net Present Value

NPV $ (5,612.87)
Note: 1. The – 5613 NPV indicates that Davidson should not
replace Matrix with Delta because it will consume the cash
flows of the company but there is one thing to be
considered and that is; this calculations only provides the
information regarding the replacement of old machine
(Matrix) into the new machine (Delta). These calculations
do not contain the information regarding the increase in
capacity of production and to meet the future expectations
of market demand for magic timber.
2.While calculating the NPV, we have assumed that the
revenue will remain same. If the revenue is increased with
the increased production capacity, it will have positive
impact on NPV.
3. We have considered 11% cost of capital however if the
cost of capital is less than 11%, it will also have positive
impact on NPV.