SINCLAIR COMPANY

GROUP 13

NUR ARISYA NATASHA

NUR AFIFAH RAZAK
NUR ASMA WARNEE BT HABIB
NOR ASNIDA BT AMRI
NORMA BT MOHKTAR @ MOHTER
SYNTHESIS OF THE CASE
Sinclair Company is considering
the purchase of more new
equipment that is more efficient to
replace the old equipment. The
company needs reliable quantitative
measure to assess if the benefits
will outweigh to the cost in order to
make a sound decision.
QUESTION A (1)

INVESTMENT $250,000
ANNUAL SAVING $72,000
PV OF $1 A YEARS ,5 YEARS, 15% 3.352
TOTAL PV OF SAVINGS $ 241,344

SO, NET PRESENT VALUE = -$ 8,656

DECISION :DO NOT PURCHASE

2)
Investment $250,000
Annual Saving $72,000
PV of $1 a years ,5 Years, 15% $3,352
Total PV of savings $ 241,344

So, Net Present Value = -$ 8,656

Decision :Do not purchase

** Book Value makes no difference

** Profit canter manager may not view the $ 135,000 write
off as irrelevant
** Sunk Cost
3)
Investment, gross $250,000
(-) Salvage Value $ 75,000
Net Investment $175,000
Annual Earnings $72,000
Present Value: $ 72,000*3.352 $ 241,344

Net PV = $ 66,344
Decision : Purchase

**Resale Value of superseded machine reduces .

4)
Investment $250,000
Annual earnings $ 37,500
Present Value,
10 years, 15%, $ 37,500*5.019 $188.213
Net Present Value -$ 61,787

Decision : Do not purchase

** Total Earning ( $ 375,000 VS $ 360,000) so, Present

Value considerably different.
** It I pattern of earnings through time that count .
Question B
Economic Life of present equipment remaining 5 years

Loan Interest 9%

Required Rate of Return 15%

Newer better equipment to be referred to as Model "B"

came after two years costing $500,000

Cost Savings from newer equipment $16000 more than

Model A

Economic Life of Model B - 5 years

Replacement Following Earlier Replacement
Rate of return (cost saving - depreciation/ Initial investment)
= 160,000 - 100,000 * 60,000 / 12 %
= 500,000/5 years= $100,000 per year
2)
The mistake came about because of the company's predatory
attitude where they would introduce to the market another
promising brand even without the previous model economic life not
yet in prescription. Due to the producers wishes to profit for money
without thinking of how useful the product can be effected into
anomalies where there product was put on hold for sometime
because of some technical issues. The company would avail of
product B chances are they would somehow offset the bank loan
which is 9 % if the figure estimated to be 12 % but still is not
enough on the point of view of the company when it comes to
return which is 15 percent.
 Question c
The 1981 TAX Act and subsequent acts
with ACRS provisions usually makes this
kind of computational nightmare for
student, because of the erratic
depreciation (which can be said officially
as cost recovery) amount in years 1-5
and the absence of such amount in the
later years.
We have assume that the ACRS
allowances stay at 35%, 26%, 15%
%,12%, and 12% for 5 years assets. The
cash years pattern, including a 5%
(assume to be time zero) ITC, is:
PV of cash saving of $160 000/year for 5 years =
$160,000 X 0.60 X 3.993 $ 383,328
Add: PV of ACRS depreciation tax shield for
$500,000 machine
= $417,970 X 0.40
$ 167,188 $
550,516

Deduct:PV of depreciation shield from old machine sacrified

($50,000/year for 3 more years) = $ 50,000 X 0.40 X 2.577
(Table B) $ 51,540
NET PRESENT VALUE OF EARNINGS $
498,976

Since $ 498,976 is more than the net investment

of $433,000, the decision is to purchase
 ACRS ALLOWANCES PVFACTOR RATIO
YEAR 1 175,000 X 0.926 =$ 162,050

YEAR 2 130,000 X 0.857 =$ 111,410

YEAR 3 75,000 X 0.794 =$ 59,550

YEAR 4 60,000 X 0.735 =$ 44,100

YEAR 5 60,000 X 0.681 =$ 40,860

$ 417,970
 PART D
Facts Of The Case:
Investment = $ 250,000
Cash inflow = $ 79,500 (Each year for the first 3
years)
Cash inflow = $ 60,750 (Each year for the
remaining 2 years)
Required rate of return = 15% before taxes
Taxes to be disregarded
SOLUTION
1. Calculate the Total Present Value & Net Present Value
Present Value = Cash inflow x Discount Factor (refer
appendix B
Net Preset Value = Total Present Value - Investment
Year Amount 15% Present
($) Discount Value ($)
factor
(based on Table B)
Cash 1-3 79,500 2.283 181,498.50
inflow
Based on Table B, 5
Cash 45 60,750 1.069 64,941.75
years value minus 3
inflow years value (3.352
TOTAL PRESENT VALUE 246,941.752.283)
Less : 250,000
Investment
NET PRESENT VALUE - 3.559.75
SOLUTION
1. Calculate the Total Present Value & Net Present Value
Present Value = Cash inflow x Discount Factor (refer
appendix B
Net Preset Value = Total Present Value - Investment
Year Amount 15% Present
($) Discount Value ($)
factor
Cash 1-3 79,500 2.283 181,498.50
inflow
Cash 45 60,750 1.069 64,941.75
inflow
TOTAL PRESENT VALUE 246,941.75
Less : 250,000
Investment
NET PRESENT VALUE - 3.559.75

Conclusion : When NPV have negative number, thus the proposal is rejected
(Not purchased)
2)
PART A PART D
Earning for each year $ 72,000 ( for each of $ 79,500 (Each year
5 years) for the first 3 years)
$ 60,750 (Each year
for the remaining 2
years)
TOTAL EARNING $ 360,000
Present Value $ 241,344 $246,441

From the table, we can conclude that when allocating more

earning in early years instead of constant earning in the
economic life of the project, it makes the present value
increased. Thus, the different in time pattern of earning make
a difference in PV / NPV result.
3)

When we conclude income taxes in the

calculation (as in Part C -1) and the
shift of time pattern of earning (as in
Part D -1) , it will result the proposal
will be accepted (purchased).
To double confirmed the
answer
1. Calculate the Net Present Value with inclusion of 40% taxes
Given : Investment Tax Credit (ITC) = 5% , Discount rate = 8%
PRESENT VALUE OF CASH SAVING
Year Amount 8% Discount 1-Tax rate Present
($) factor Value ($)
Cash inflow 1-3 79,500 2.577 0.60 122,922.9

Cash inflow 45 60,750 1.416 0.60 51,613.2

(3.993 2.577)
PRESENT VALUE OF ACRS DEPRECIATION TAX SHIELD
Amount ($) Tax rate Present
Value ($)
208,985 0.40 83,594
TOTAL PRESENT VALUE 258,130.1
Less : Investment, net ITC (5% 237,500
from $250,000)
NET PRESENT VALUE 20,630.1

Conclusion : When NPV have non-negative number, thus the proposal is

accepted (Purchased)
Calculation of ACRS Depreciation
Year ACRS Allowance 8% Discount Total ($)
factor
1 87,500 (35% x 250,000) 0.926 81,025
2 65,000 (26% x 250,000) 1.783 55,705
3 37,500 (15% x 250,000) 2.577 29,775
4 30,000 (12% x 250,000) 3.312 22,050
5 30,000 (12% x 250,000) 3.993 20,430
TOTAL 208,985
CONCLUSION
To determine if the company should
decide on replacing its equipment, it
should first study whether the
anticipated cash flows from the new
equipment is sufficiently attractive to
warrant risking of funds in buying a new
equipment. This is done by also taking
into the account the NPV, IRR,
economic life salvage value and also tax
rates.
Thank you...

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