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Hi Teacher, Can you help me with the question on 12/ 2009 F9, as known as question 52 in practice book Dec 2015 to August 2016.
ASOP want to buy a new machine. it will reduce operating costs by $5.8 per unit.
if it bought the new machine,it would finance the purchase theough bank with annual interest of 8.6%.
the company WACC is 11%.
the question is calculate NPV of buying using Financing cash flow only and using WACC. The answer take into account of saved operating cost when using WACC but not for financing cash flow method. I dont understand why.
Can you explain for me, please?
Thank you,In part (a) you are comparing leasing with buying and since the saved operating costs are the same in both cases they have been ignored in deciding which is the cheapest of the two.
You could have brought in the saving in both cases, and although the PV’s would be different, buying would still be the cheapest by the same amount, and all part (a) wanted to know is which would be better.In part (b) you are asked for the NPV of the buying option and so in part (b) all cash flows need taking into account.
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