SINCLAIR COMPANY

GROUP 13
NUR ARISYA NATASHA
NUR AFIFAH RAZAK
NUR ASMA WARNEE BT HABIB
NOR ASNIDA BT AMRI
NORMA BT MOHKTAR @ MOHTER

SYNTHESIS OF THE CASE

Sinclair Company is considering
the purchase of
more new
equipment that is more efficient to
replace the old equipment. The
company needs reliable quantitative
measure to assess if the benefits
will outweigh to the cost in order to
make a sound decision.

QUESTION A (1)
INVESTMENT
$250,000
ANNUAL SAVING
$72,000
PV OF $1 A YEARS ,5 YEARS, 15%
3.352
TOTAL PV OF SAVINGS
$ 241,344
SO, NET PRESENT VALUE = -$ 8,656
DECISION :DO NOT PURCHASE

2)
Investment
$250,000
Annual Saving
$72,000
PV of $1 a years ,5 Years, 15%
$3,352
Total PV of savings
$ 241,344
So, Net Present Value = -$ 8,656
Decision :Do not purchase
** Book Value makes no difference
** Profit canter manager may not view the $ 135,000 write
off as irrelevant
** Sunk Cost

3)
Investment, gross
$250,000
(-) Salvage Value
$ 75,000
Net Investment
$175,000
Annual Earnings
$72,000
Present Value: $ 72,000*3.352 $ 241,344
Net PV = $ 66,344
Decision : Purchase
**Resale Value of superseded machine reduces .

4)
Investment $250,000
Annual earnings
$ 37,500
Present Value,
10 years, 15%, $ 37,500*5.019
$188.213
Net Present Value -$ 61,787
Decision : Do not purchase
** Total Earning ( $ 375,000 VS $ 360,000) so, Present
Value considerably different.
** It I pattern of earnings through time that count .

Question B
Economic Life of present equipment remaining 5 years
Loan Interest 9%
Required Rate of Return 15%
Newer better equipment to be referred to as Model "B"
came after two years costing $500,000
Cost Savings from newer equipment $16000 more than
Model A
Economic Life of Model B - 5 years
Replacement Following Earlier Replacement
Rate of return (cost saving - depreciation/ Initial investment)
= 160,000 - 100,000 * 60,000 / 12 %
= 500,000/5 years= $100,000 per year

2)
The mistake came about because of the company's predatory
attitude where they would introduce to the market another
promising brand even without the previous model economic life not
yet in prescription. Due to the producers wishes to profit for money
without thinking of how useful the product can be effected into
anomalies where there product was put on hold for sometime
because of some technical issues. The company would avail of
product B chances are they would somehow offset the bank loan
which is 9 % if the figure estimated to be 12 % but still is not
enough on the point of view of the company when it comes to
return which is 15 percent.

Question
c
The 1981 TAX Act and subsequent acts
with ACRS provisions usually makes this
kind of computational nightmare for
student, because of the erratic
depreciation (which can be said officially
as cost recovery) amount in years 1-5
and the absence of such amount in the
later years.
We have assume that the ACRS
allowances stay at 35%, 26%, 15%
%,12%, and 12% for 5 years assets. The
cash years pattern, including a 5%
(assume to be time zero) ITC, is:

PV of cash saving of $160 000/year for 5 years =

$160,000 X 0.60 X 3.993 $ 383,328
Add: PV of ACRS depreciation tax shield for
$500,000 machine
= $417,970 X 0.40
$
167,188
$
550,516
Deduct:PV of depreciation shield from old machine sacrified
($50,000/year for 3 more years) = $ 50,000 X 0.40 X 2.577
(Table B)
$ 51,540
NET PRESENT VALUE OF EARNINGS
$
498,976
Since $ 498,976 is more than the net investment
of $433,000, the decision is to purchase

ACRS ALLOWANCES

PVFACTOR RATIO

YEAR

1 175,000

X 0.926 =$ 162,050

YEAR

2 130,000

X 0.857 =$ 111,410

YEAR

75,000

X 0.794 =$ 59,550

YEAR

60,000

X 0.735 =$ 44,100

YEAR

60,000

X 0.681 =$ 40,860

$ 417,970

PART D
Facts Of The Case:

Investment = $ 250,000
Cash inflow = $ 79,500 (Each year for the first 3
years)
Cash inflow = $ 60,750 (Each year for the
remaining 2 years)
Required rate of return = 15% before taxes
Taxes to be disregarded

SOLUTION
1. Calculate the Total Present Value & Net Present Value
Present Value = Cash inflow x Discount Factor (refer
appendix B
Net Preset Value = Total Present Value - Investment
Year

Cash
inflow

1-3

Cash
inflow

45

Amount
($)
79,500
60,750

TOTAL PRESENT VALUE

Less :
Investment
NET PRESENT VALUE

15%
Discount
factor
2.283
1.069

Present
Value ($)
(based on Table B)
181,498.50
Based on Table B, 5
64,941.75
years value minus 3
years value (3.352
246,941.752.283)

250,000
- 3.559.75

SOLUTION
1. Calculate the Total Present Value & Net Present Value
Present Value = Cash inflow x Discount Factor (refer
appendix B
Net Preset Value = Total Present Value - Investment
Year

Amount
($)

15%
Discount
factor

Present
Value ($)

Cash
inflow

1-3

79,500

2.283

181,498.50

Cash
inflow

45

60,750

1.069

64,941.75

TOTAL PRESENT VALUE

Less :
Investment
NET PRESENT VALUE

246,941.75
250,000
- 3.559.75

Conclusion : When NPV have negative number, thus the proposal is rejected
(Not purchased)

2)
PART A
Earning for each year

$ 72,000 ( for each of

5 years)

TOTAL EARNING
Present Value

PART D
$ 79,500 (Each year
for the first 3 years)
$ 60,750 (Each year
for the remaining 2
years)

$ 360,000
$ 241,344

$246,441

From the table, we can conclude that when allocating more

earning in early years instead of constant earning in the
economic life of the project, it makes the present value
increased. Thus, the different in time pattern of earning make
a difference in PV / NPV result.

3)
When we conclude income taxes in the
calculation (as in Part C -1) and the
shift of time pattern of earning (as in
Part D -1) , it will result the proposal
will be accepted (purchased).

To double confirmed the

answer
1. Calculate the Net Present Value with inclusion of 40% taxes

Given : Investment Tax Credit (ITC) = 5% , Discount rate = 8%

PRESENT VALUE OF CASH SAVING

Year

Amount
($)

8% Discount
factor

1-Tax rate

Present
Value ($)

Cash inflow

1-3

79,500

2.577

0.60

122,922.9

Cash inflow

45

60,750

1.416
(3.993 2.577)

0.60

51,613.2

PRESENT VALUE OF ACRS DEPRECIATION TAX SHIELD

Amount ($)

Tax rate

Present
Value ($)

208,985

0.40

83,594

TOTAL PRESENT VALUE

Less : Investment, net ITC (5%
from $250,000)
NET PRESENT VALUE

258,130.1
237,500
20,630.1

Conclusion : When NPV have non-negative number, thus the proposal is

accepted (Purchased)

Calculation of ACRS Depreciation

Year

ACRS Allowance

8% Discount
factor

Total ($)

87,500 (35% x 250,000)

0.926

81,025

65,000 (26% x 250,000)

1.783

55,705

37,500 (15% x 250,000)

2.577

29,775

30,000 (12% x 250,000)

3.312

22,050

30,000 (12% x 250,000)

3.993

20,430

TOTAL

208,985

CONCLUSION
To determine if the company should
decide on replacing its equipment, it
should first study whether the
anticipated cash flows from the new
equipment is sufficiently attractive to
warrant risking of funds in buying a new
equipment. This is done by also taking
into the account the NPV, IRR,
economic life salvage value and also tax
rates.

Thank you...

Q&A