Table 1 shows the calcuation of free cash flows of two machines when the tax on profit is 30%. ‘Working capital is funds that set aside to ensure that the company has sufficient cash flows to maintain operations whilst undertaking the project’ (Frino, Hill and Chen 2009). Working capital of Machine A and Machine B is $80,000 and $70,000 payments respectively in the year 0, and the payments will be recovered at the end of investment period e.g. the 6th year and 10th year. Further, the market analysis at a cost of $5000 is recognized as sunk cost because it incurred in the past and does not affect present

decision, therefore it should be ignored. In addition, the salvage value is the profit on disposal of assets in the sixth year, which is $5000 inflows for Machine A and $2000 for Machine B. In addition, the annual depreciation expense is calculated by the total of initial cost plus the instalment divided by useful years as it uses the straight-line method and there is no residual value. The depreciation expense for Machine A and Machine B is $17,500 and $15,400 respectively. Finally, the10% loan repayment is finance charge and therefore should be excluded from free cash flow. Calculation of NPV, IRR and EAA for two Machines with the Tax of 30% NPVof Machine A NPV =ΣCFt / (1+r)t= $38,850/(1+0.118)1 +$38,850/(1+0.118)2 + $38,850/(1+0.118)3 + $38,850/(1+0.118)4 + $38,850/(1+0.118)5 +$122,350/(1+0.118)6 – $185,000 = $18,396.84 IRR of Machine A 0=ΣCFt / (1+irr)t= $38,850/(1+irr)1 + $38,850/(1+irr)2 + $38,850/(1+irr)3 + $38,850/(1+irr)4 + $38,850/(1+irr)5 +$122,350/(1+ irr)6 – $185,000 irr = 15% EAA of Machine A

-n NPV = A [1-(1+re) ] / Re

$18,396.84=A [1-(1+0.118)-6]/0.118 A=$4,449.27 NPV of Machine B NPV =ΣCFt/(1+r) t= $46,620/(1+0.118)1 + $46,620/(1+0.118)2+$46,620/(1+0.118)3 +$46,620/(1+0.118)4 +$46,620/(1+0.118)5 +$46,620/(1+0.118)6 +$46,620/(1+0.118)7 +$46,620/(1+0.118)8 +$46,620/(1+0.118)9 +$118,020/(1+0.118)10 -$224,000 =$64,987.48 IRR Of Machine B 0= ΣCFt/ (1+irr)t= $46,620/(1+irr)1 + $46,620/(1+irr)2+$46,620/(1+irr)3 +$46,620/(1+irr)4 +$46,620/(1+irr)5 +$46,620/(1+irr)6 +$46,620/(1+irr)7 +$46,620/(1+irr)8 +$46,620/(1+irr)9 +$118,020/(1+irr)10 -$224,000 irr = 18% EAA of Machine B

-n NPV = A [1-(1+re) ] / Re

$64,987.48= A [1-(1+0.118)-10] /0.118 A=$11,407.75 Conclusion for Part 1 Three techniques all…