Finance Essay Example | Topics and Well Written Essays - 1000 words - 19

Finance - Essay Example The profit after corporate tax rate of 30% comes to $ 7245000. The Net Present Values of the project has been calculated by taking into account the initial investment and the cash flow streams at the end of every year and it comes to $ -28566432.13 (Kirkpatrick and Weiss, 1996, p. 15). This means that the company would not be able to break even at the end of 4 years and thus the new technology should be implemented for avoiding the expenditure burden for the company. In the scenario of adoption of the new technology, the company would be able to reduce the per unit production cost and as a result of which the profit for the company will increase at the same selling price of the product (Peterson and Fabozzi, 2004, p. 71). The company has to incur an initial investment of $55000000. The advantage for this project is that the company will get back a salvage value of the new machine at the end of four years and also some value from the resale of the old machine. The cash flows at the end of each year would also be more compared to the old machine. Thus after calculation of the NPV it is found that it is still negative but the figure is much better as compared to the old machine. The financing for the new Machine can be done by selling the old machine @ $ 1,20,00,000 and the remaining amount of $ 5,50,00,000 has to be taken as a loan from a bank with a rate of interest @ 9 % pa. Thus the interest has to be deducted from the Profit before calculating the NPV of the new project (Chapman and Ward, 2007, p. 47). Decision Tree Analysis: It is one of the commonly used techniques for evaluating the permeability of a project. In case of a decision tree, the projects various possible situations are calculated and their associated probabilities of occurrences are taken into consideration. Accordingly a diagram is plotted and that gives an idea of the situations that might happen due to the occurrence of a particular project and how much return it