Question
Alan Smith is working as a printing technician at Aztenca Ltd. He has been approached by the CEO to prepare an investment budget report to decide on replacing to introduce 3D printers as part of their new line of business offering. Alan Smith has approached you to help him make a financial evaluation on two types of 3D printer models he has identified. Along with Alan Smith, you are required to prepare a report to present to the CEO, showing the various cash flows based on the different scenarios. Your submission should include the following.
• The use of Excel to evaluate whether the
company should proceed with the purchase of Premium or basic 3D Printers, taking into consideration the different scenarios.
- Question Alan Smith Is Working As A Printing Technician At Aztenca Ltd He Has Been Approached By The Ceo To Prepare An 1 (111 KiB) Viewed 36 times
Aztenca Ltd CASE DETAILS Aztenca Ltd is a publicly listed
company that is based in Sydney. One of its main operating businesses is to provide companies with 3D printing services. All their current 3D Printers are due to be retired, they must decide whether to replace them with a Premium or basic model. New 3D Printers have an expected useful life of 8 years, after which residual values are $70,000 for the Premium 3D Printers and $45,000 for the basic 3D Printers. Market research has estimated that there is a 60% probability that demand will be high throughout the useful life of the 3D Printers, and a 40% probability that demand will be low throughout the useful life of the 3D Printers. The Premium model is expected to cost $900,000, with an extra installation and shipping cost of $80,000. The basic model is expected to cost $650,000, with an additional installation and shipping cost of $45,000. The
company's accounting policy is to depreciate using the reducing balance approach of 20% per annum. There is also an increase in the net working capital of $70,000 for the Premium model, and $40,000 for the basic model. The net working capital is recoverable at the end of their useful life. In the event of high demand, the
company expects a yearly operating revenue of $800,000 for the Premium model, and a yearly operating revenue of $330,000 for the basic model. If the demand is low, annual operating revenue is forecasted to be $700,000 for the Premium model and $280,000 for the basic model. Annual variable and fixed costs associated with operating these 3D Printers are expected to be $400,000 for the Premium model and $150,000 for the basic model. In addition, if the Premium model is preferred over the basic model, the
company needs to rent an additional warehouse to store the Premium 3D Printers. A new warehouse rental cost is expected to be $150,000 per annum. At the end of year four, there is also an option to cease operation and thus sell the Premium 3D Printers for $500,000 and the basic 3D Printers for $400,000 if the business is not profitable. The cost of capital for Aztenca Ltd is 9.28% and this will be the appropriate discount rate that management uses to value its projected cash flows. The
company tax rate is 30%.