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BVBA Solar Perfect wants to invest in new machines. The cost of this machine is...

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Accounting

BVBA Solar Perfect wants to invest in new machines. The cost of this machine is currently 300,000 euro. Depreciation will be non-linear :40% in the first year ,30% in the second year and 15% in year 3 and year 4. They expect that the salvage value of the machine will be 20,000 euro at the end of year 4. As a result of the investment the production costs will decrease from 800,000 euro per year to 690,000 euro from year 1 till year 4. Sales, 1,000,000 euro per year will not change. In year 0 there is also an investment of 10,000 euro in net working capital and that investment will be reversed in year 4.The market value of the companys equity is 18 million euro and its debt has a market value of 25 million euro. The company is profitable and the tax rate is 30%. The cost of equity is 10% and the cost of debt is 4%.

a) Calculate the annul free cash flows.

b) Would you advice the management to do this project based on the VPV?

c) An alternative investment only requires an initial investment of 280,000 euro and generates the following 6 years (economic lifetime) an annual free cash flow of 70,000 euro. Is this project a better choice? Motivate your answer.

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