Financial

Management
Submitted by:
Abhishek Barua Arpit Todi
Jai Saxena Muskan Lodi
Omkar Abhishek MN
Manish Prabhat
CASE OVERVIEW
The Barrett Corporation is a medium-sized manufacturing company

There is an increased demand for copper wires

They want to purchase new machinery for expansion

Following is a proposal under consideration

Comparison of Cost between MX430 & MX900
Operating Statement MX430 MX900
Change in inventory 250000 0
Depreciation 300000 816666
Total Expenses 550000 816666
Additional Expenses - 266666

At Present With MX900

Revenue $13,000,000 $21,000,000

Expense $7,000,000 $13,500,000

Step 1:
Calculating Cash Inflow due to selling of Asset and Tax on sale of Asset

Book Value (1) Cash Inflow (2) (2)-(1) TAX@50% ATCI

Year 0 900000 1200000 300000 150000 150000

Step 2:
Calculating Net Cash Flow when new machine is bought and the old is sold

Net Cash Outflow = Cost of New Asset + Installation + Working Capital tied to
the project-cash value received from sale of old asset-tax
Step 2 continued:
Year 1989 (1) Discounted to 1990 Year 1990 (2) Total (1+2)

Cost of new
4500000
asset 3000000
1900000 2166000
Installation 400000

Cash Received
from sale of old 1200000 1200000
asset

Tax 150000 150000

Total cash outflow: 2166000+3000000-1200000+150000 = 4,116,000

Step 3:
Operating Statement of MX430 and MX900
MX430 MX900

Revenue (1) 13,000,000 21,000,000

Expenses (2) 7,000,000 13,500,000

Revenue after Expense (1-2) 6,000,000 7,500,000

Depreciation (3) 300,000 816,666

Revenue before Tax (1-2-3) 5,700,000 6,683,334

Tax @50% (4) 2,850,000 3,341,667

Revenue after Tax (1-2-3-4) 2,850,000 3,341,667

Depreciation (Add) 300,000 816,666

ATCI 3,150,000 4,158,333

Step 4:
Calculating Present Value
MX430 (1) MX900 (2) Difference (2-1)

Year 1990 3,150,000 4,158,333 1,008,333

Year 1991 3,150,000 4,158,333 1,008,333

Year 1992 3,150,000 4,158,333 1,008,333

Step 5:
Calculating NetPresent Value by replacing MX430 with MX900
1990 1991 1992 Total

NPV 1,008,333/1.14 1,008,333/(1.14)^2 = 1,008,333/(1.14)^3 = 2,340,978

= 884502 775879 680596
Conclusion:
Net Cash outflow is $ 4,116,000 whereas total additional cash inflow due to
MX900 is $ 2,340,978.

Hence, it does not make economic sense to buy the machine now.