Question

Fifa Worldcup Ltd. is considering to buy a new soccer ball inflating machine for replacement of an old one which has both a book value and a market value of zero. However, it is still in good working order and will last physically for at least another 10 years. It is expected that it will provide an annual net cash flow of approx. 20,000. But the proposed replacement machine with an identical capacity will perform the operation much more efficiently. Fifa Worldcup engineers estimate that the new machine will produce cost savings leading to after tax cash flow improvement of € 9,000 a year. Cost of the investment delivered and installed is at € 40,000, its estimated life-time is 10 years – afterwards its residual value is zero. The firm’s after tax cost of capital is at 10 percent, marginal tax rate is 35 %. Should Fifa Worldcup Ltd. make the investment ?

Answer 1

Discount rate	10.000%
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-40000.000	9000.000	9000.000	9000.000	9000.000	9000.000	9000.000	9000.000	9000.000	9000.000	9000.000
Discounting factor	1.000	1.100	1.210	1.331	1.464	1.611	1.772	1.949	2.144	2.358	2.594
Discounted cash flows project	-40000.000	8181.818	7438.017	6761.833	6147.121	5588.292	5080.265	4618.423	4198.566	3816.879	3469.890
NPV = Sum of discounted cash flows
NPV Project =	3815.77
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

NPV is positive, accept the improvement project