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Hi Sir
I need to calculate the NPV (a 5 year evaluation period for capital investment purposes) from forecast financial forecast. Some of the adjustments are:
(i) An investment in new machinery $ 1,125,000
(ii) Old machine will be disposed for $ 102,500, payable immediately
(iii) 4 machines operator will lose their job once the new machine become operational. A redundancy payment of $ 15,500 per machine operator is expected to be settled immediately.
(iv) Tax on profits at a rate of 30% and claims on capital allowances on machinery on a 25% reducing balance basis. Balancing allowances or charges are claimed only on disposal of assets.My questions are as follows:
– Should the disposal be accounted as cost only in Year 1;
– How the redundancy payment is accounted and is it only for Year 1;
– What about the balancing allowances claimed only on disposal of assets.Thank you.
From the wording of the question, the disposal amount of 102,500 is a cash inflow – not a cost.
It says that it is immediately and so it is at time 0.The same applies to the redundancy payments – they are to be settled immediately and are therefore at time 0.
The balancing charge or allowance will be calculated at the end of the 5 years in the usual way.
(There is no such thing as year 1 or year 2 in discounting. We are looking at points in time that are 1 year apart. So time 0 is now – the start of the first year. Time 1 is one year later – the end of the first year / start of the second year. Time 2 is another year later – the end of the second year / start of the third year, and so on.
I do suggest that you watch our free lectures on investment appraisal, and if necessary the free lectures for Paper F9 appraisal because this is revision of F9.)
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