caseism

Magic Timber And Steel: Investment Evaluation With Net Present Value Case Solution & Answer

Magic Timber And Steel: Investment Evaluation With Net Present Value Case Study Solution

Sensitivity Analysis

The net present value of – 23,242 means that you should not invest in a new wood processing machine (Delta) as it will absorb the cash flow instead of the cash flow. But one aspect to keep in mind is that these calculations only provide information about replacing the old machine (Matrix) with a new machine (Delta). These calculations do not include information on increasing production capacity and meeting future demand expectations in the timber market.The calculations are shown in Exhibit 1 of the document.

Considering the 9% discount rate, the 5% internal test rate, and the 30% tax rate, the sensitivity analysis for NPV when purchasing new machines gives a negative NPV value.

In the next step, we changed some of the sensitivity analysis criteria. We changed the interest rate from 10% to 9%, the tax rate from 25% to 30%, the sales from 60,000 to 100,000 at the end of Delta’s fifth year, and the annual interest rate on capital from 6% We changed it to 5% when purchasing the first Delta fixed maintenance costs from 2000 to 1000.

The + 3068 NPV said that after performing a sensitivity analysis, we found that companies with positive NPVs are attractive. The calculations are shown in Exhibit 2 of the document.

Recommendations

After making the analysis of two options, alternative 2 was found to be suitable for magic wood and steel. Because Option 2 offers an almost complete solution to all the major problems facing the business. Although the second alternative provides a negative NPV, it can completely solve all four major problems of Magic Timber and Steel. The negative NPV does not include new estimates of machine construction or estimates of future sales. It includes only the replacement costs of producing wood with advanced technology and the lower production costs.

References

McCarthy, S. (2016). MAGIC TIMBER AND STEEL. Richard Ivey School of Business Foundation: Ivey Publishing.

Exhibit 1

Net Present Value for Purchasing the New Machine Delta
 Discount Rate 10%
 Interest Rate 6%
 Tax Rate 25%
 Net Savings and (Payments) of Tax:  Year 0  Year 1  Year 2  Year 3  Year 4  Year 5
 Old Machine
 Depreciation Forgone      (6,000)     (6,000)    (6,000)    (6,000)     (6,000)
 Repair and Maintenance          (28,000)    (7,000)     (7,000)  (11,000)    (7,000)     (7,000)
 New Machine
 Depreciation     14,000     14,000    14,000   14,000     14,000
 loss on sales proceed               10,000
 Repair and Maintenance       2,000       3,000      4,000     5,000       6,000
 6% interest rate       8,400       8,400      8,400     8,400       8,400
 Savings in labor cost      (5,250)     (5,500)    (5,750)    (6,000)     (6,250)
 Savings in electricity cost      (4,725)     (4,800)    (4,875)    (4,950)     (5,025)
 Total          (28,000)     1,425       2,100    (1,225)     3,450     14,125
 Net Savings and (Payments) of Tax            (7,000)        356          525       (306)        863       3,531
 Cash Flows:  Year 0  Year 1  Year 2  Year 3  Year 4  Year 5
 Immediate sale of Matrix           35,000          
 Scrap forgone               (5,000)
 Repair and Maintenance (Matrix)           28,000     7,000       7,000    11,000     7,000       7,000
 Immediate Purchase of Delta        (140,000)          
 Repair and Maintenance (Delta)      (2,000)     (3,000)    (4,000)    (5,000)     (6,000)
 6% interest rate      (8,400)     (8,400)    (8,400)    (8,400)     (8,400)
 Savings in labor cost       5,250       5,500      5,750     6,000       6,250
 Savings in electricity cost       4,725       4,800      4,875     4,950       5,025
 Sales Proceeds of Delta               60,000
 Net Savings and (Payments) of Tax            (7,000)        356          525       (306)        863       3,531
 Total Cash Flows          (84,000)     6,931       6,425      8,919     5,413     62,406
 Discount Factor                    1   0.9091     0.8264    0.7513   0.6830     0.6209
 Discounted Cash Flows          (84,000)     6,301       5,310      6,701     3,697     38,749
 Net Present Value (NPV)          (23,242)
 By Excel Formula (NPV)          (23,242)

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.

Share This

LOOK FOR A FREE CASE STUDY SOLUTION

JUST REGISTER NOW AND GET 50% OFF ON EACH CASE STUDY