Question

	LCC	HCC
Purchase Price	$400,000	$480,000
Useful Life (years)	4	6
Depreciation (reducing balance method)	40% p.a.	30% p.a.
Salvage value at the end of useful life	$80,000	$48,000
Annual interest expense	$48,000	$48,000
Annual scrap revenue	$450,000	$600,000
Annual operating costs:
– Variable overheads	$50,000	$150,000
– Salaries	$80,000	$110,000
– Marketing	$45,000	$60,000

Salaries represent the costs of employing two new machine operators at a salary of $40,000 per annum each. For the HCC machine, the company will only need to employ a new machine operator and the second, who earns $70,000 per annum, will be transferred from the axle assembly plant. The second operator from the main plant would otherwise have been made redundant with a redundancy payment of $50,000.

c) The marketing cost is based on the standard allocation of the new investment towards group advertising expenses, which is 10% of annual revenue. It has been estimated that the additional group advertising required to promote the sales of fine or rough scrap is only $40,000 per year

I am confused with the figures that would be considered for casflow

Answer 1

In order to calculate the cashflow at the project level, the individual project level information should be used. The Cash Flow projection has 2 figures that would differ at project level vs company level assessment

1) Cost of Salaries

While Assessing the project level benefit analysis , for cash flows estimates

the figure for salaries for LCC will be $ 80,000 and for HCC will be $ 110,000

While Assessing the compay level benefits for the project, for the cash flows estimate

the figure for salaries for LCC will be $ 80,000 and for HCC will be $ 40,000

2) Cost of Salaries

While Assessing the project level benefit analysis , for cash flows estimates

the figure for marketing for LCC will be $ 45,000 and for HCC will be $ 60,000

While Assessing the compay level benefits for the project, for the cash flows estimate

the figure for marketing for LCC will be $40,000 and for HCC will be $ 40,000