ACC303 Communication Research Practices - Individual Assessment Task 2

Assessment Task 2

Part B: Excel Task
Question 2: NPV Calculation with taxes

Jaunty Ltd must comply with a new law which states that all manufaturers must have vending machines. This is mandatory.

Jaunty approaches 2 contractors.

Lotsa Moke Ltd offers to sell a vending machine to Jaunty for $65,000. This machine has a 20 year useful life. Its residual value is $5,000. It will cost $800 electricity per year. Drongo Ltd offers to sell a vending machine to Jaunty for $99,000. It has a 10 year useful life and its residual value is $18,000. It will also cost $800 per year electricity. Jaunty applies a 6% rate of return to similar projects. The corporate tax rate is 30%.

Required:

Calculate the NPV of both offers and decide which one Jaunty should accept (Lotsa Moke Ltd or Drongo Ltd). You will have to apply a profitability index to make this decision (see lecture notes Week 5, Slide 17) but rememeber, these are costs (not additional revenues) so you should choose appropriately.

(Hint: You will need to follow similar steps to Question 1, but you must also perform another step which is the calculation of the tax shield. This tax shield value is an additional cash inflow (cash saving) which will be added to the incremental cash flows. Go to the lecture notes if you don't remeber how to do this. Email me if you are really struggling)