Question

RonSIM Industries Limited is considering buying a new $600,000 stamping machine to replace an existing machine. This new stamping machine would allow the Company to achieve better quality of products and sales would increase to $850,000, $870,000, $920,000 and $950,000 over the next 4 years. Based on historical data, the working capital requirement is assumed to be 30% of sales. The new machine can be sold for $90,000.

The existing stamping machine was purchased 2 years ago for $450,000. This machine is expected to generate sales of $550,000, $600,000, $650,000 and $700,000 over the next 4 years. The working capital for the existing machine is assumed to be 25% of sales and management expects that this machine can be sold at $25,000 in 4 years’ time.

Calculate the net terminal cash flow for this replacement project.

Answer 1

Given data is for both new and existing stamping machines. Hence, the net terminal cash flow can be calculated in the following manner:

PARTICULARS	EXISTING MACHINE	NEW MACHINE	NET TERMINAL AMOUNT
Year - 1	550,000 - 25% = 412,500	850,000-30% =595,000	= 595,000 - 412,500 = 182,500
Year - 2	600,000 - 25% = 450,000	870,000-30% = 609,000	= 609,000 - 450,000 = 159,000
Year - 3	650,000 -25% = 487,500	920,000 - 30% = 644,000	= 644,000 - 487,500 = 156,500
Year - 4	700,000 - 25% = 525,000	950,000 - 30% = 665,000	= 665,000 - 525,000 = 140,000
Machine sale at end	25,000	90,000	= 90,000 - 25,000 = 65,000

Hence, total Net Terminal Cash flow = 65,000 + 140,000 + 156,500 + 159,000 + 182,500 = 703,000