Answer:

Information given:

Cost (including installation)($) 75,000

Salvage value 0
Operating and maintenance ($/year) 6,000
Revenues ($/year) 18,000
Income Tax (%) 0.28
Corporate Investment (%) 0.08
Project life (year) 8
Depreciation life (year) 5
Oppurtunity capital cost 0.08

Depreciation value ($) 15000

(i) Develop the income statement for the whole of the boiler operating life

Period 1 2 3 4 5
Revenues ($/year) 18000 18000 18000 18000 18000
Operating and maintenance ($/year) 6000 6000 6000 6000 6000
Depreciation value ($) 15000 15000 15000 15000 15000

Taxable income ($) -3000 -3000 -3000 -3000 -3000

Income tax (28%) -840 -840 -840 -840 -840

Net income -2160 -2160 -2160 -2160 -2160

(ii) Develop the cash flow statements for the whole operating life of the boiler.

Period 1 2 3 4 5
Operating activities
Net income -2160 -2160 -2160 -2160 -2160
Depreciation value 15000 15000 15000 15000 15000

Net Cash flow 12840 12840 12840 12840 12840

(iii) Would you recommend installing the oxygen analyzer on the boiler? Provide justifications to support your recommendation.

1+r = 1.08 5% Internal Rate of Return

NPV = -8579.657
Cost -75,000
1 12,840
2 12,840
3 12,840 Therefore, it is not recommended to install the oxygen analyzer
on the boiler since its internal rate of return (IRR) is less than
4 12,840 oppurtinity capital cost which is 8%
5 12,840
6 8,640
7 8,640
8 8,640
 6 7 8
18000 18000 18000
6000 6000 6000
0 0 0

12000 12000 12000

3360 3360 3360

8640 8640 8640

6 7 8

8640 8640 8640

0 0 0

8640 8640 8640

ecommendation.