Question

flake center is considering purchasing new manufacturing equipment for 90000. the old network can be sold for 7000. the new network will require additional working capital of 10000. its anticipated eight-year life will generate additional client revenue of 40000 annually with operating costs, excluding depreciation, of 20000. at the end of eight years, it will have a salvage value of 9000 and return 8000 in working capital. taxes are not included.

1) if the company has a required rate of 12%, what is the net present value of the proposed investment?

2) assume taxes are 30%, what is the after-tax NPV of the proposed investment?

Answer 1

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Flake Centre
Particulars	Y0	Y1	Y2	Y3	Y4	Y5	Y6	Y7	Y8	Total
Cost of new equipment	(90,000.00)	-	-	-	-	-	-	-	-	(90,000.00)
Salvage of old equipment	7,000.00	-	-	-	-	-	-	-	-	7,000.00
Additional working capital	(10,000.00)	-	-	-	-	-	-	-	8,000.00	(2,000.00)
Salvage of new equipment	-	-	-	-	-	-	-	-	9,000.00	9,000.00
Net Additional revenue	-	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	320,000.00
Net cash flows	(93,000.00)	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	57,000.00	244,000.00
PV factor at 12%	1.00	0.89	0.80	0.71	0.64	0.57	0.51	0.45	0.40
Present Value	(93,000.00)	35,714.29	31,887.76	28,471.21	25,420.72	22,697.07	20,265.24	18,093.97	23,021.34	112,571.61
NPV is $ 112,571.61
Flake Centre
Particulars	Y0	Y1	Y2	Y3	Y4	Y5	Y6	Y7	Y8	Total
Net Additional revenue	-	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	40,000.00	320,000.00
Less: Depreciation	-	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	160,000.00
Taxable Revenue	-	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	160,000.00
Tax at 30%	-	6,000.00	6,000.00	6,000.00	6,000.00	6,000.00	6,000.00	6,000.00	6,000.00	48,000.00
After-tax Revenue	-	14,000.00	14,000.00	14,000.00	14,000.00	14,000.00	14,000.00	14,000.00	14,000.00	112,000.00
Add: Depreciation	-	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	20,000.00	160,000.00
Net Operating cash inflows	-	34,000.00	34,000.00	34,000.00	34,000.00	34,000.00	34,000.00	34,000.00	34,000.00	272,000.00
Cost of new equipment	(90,000.00)	-	-	-	-	-	-	-	-	(90,000.00)
Salvage of old equipment	7,000.00	-	-	-	-	-	-	-	-	7,000.00
Additional working capital	(10,000.00)	-	-	-	-	-	-	-	8,000.00	(2,000.00)
Salvage of new equipment	-	-	-	-	-	-	-	-	9,000.00	9,000.00
Net cash flows	(93,000.00)	34,000.00	34,000.00	34,000.00	34,000.00	34,000.00	34,000.00	34,000.00	51,000.00	196,000.00
PV factor at 12%	1.00	0.89	0.80	0.71	0.64	0.57	0.51	0.45	0.40
Present Value	(93,000.00)	30,357.14	27,104.59	24,200.53	21,607.61	19,292.51	17,225.46	15,379.87	20,598.04	82,765.77
NPV is $ 82,765.77