Case: “Magic Timber and Steel:
Investment Evaluation with Net Present Value (NPV)”
Assignment Questions:
1.
Using an NPV analysis, advise
Davidson as to whether or not Magic should purchase the new Delta finishing
machine. The company tax rate applicable to Magic is 30%. While Davidson has
not calculated his own cost of capital, his colleague with a similar business
about 200 kilometers away advises that his cost of capital is 11 percent.
Complete this question in a spreadsheet. This approach will be especially
useful when answer Question 3.
2.
Are there other factors that
have not been taken into account in the NPV analysis that might have an impact
on your decision (i.e. quantitative and/or qualitative)? Identify these factors
as bullet points, along with a few sentences to explain their relevance. Would
any of these factors change you answer to Question 1? Answer Yes or No, and
include three or four sentences to explain your decision.
3.
Conduct the following
sensitivity analyses:
a.
Change the discount rate to 12%
b.
Change the Year 5 selling price
of the Delta to $80,000.1
c.
Change the maintenance costs of
the Delta: Year 1 costs are $1,000, increasing by $1,000 each year.
d.
Change all of the above factors
together.
4.
Based on your answers to
Questions 1, 2 and 3, write a 500-word report to Davidson to present your
recommendation.
1 All currency amounts are in
AU$ unless otherwise stated.
Source:
Harvard Business Publishing
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Investment Evaluation with Net Present Value (NPV appeared first on Solved Students Assignments.