Question

1. Daily Enterprises is purchasing a $14,000,000 machine. The machine will be depreciated using straight-line depreciation over its 10 year life and will have no salvage value. The machine will generate revenues of $7,500,000 per year along with fixed costs of $2,000,000 per year.

(please show steps)

1. If Daily's marginal tax rate is 28%, what will be the cash flow in each of years 1 to 10 (the cash flow will be the same each year)?
2. If the discount rate is 6%, what is the NPV of the project? The cash flow each year is $4,352,000.
3. Should Daily accept or reject the project (choose one)?
4. Find the Net Present value Break-even level of revenues, assuming the costs are all fixed costs.

Answer 1

Based on the given data, pls find below the steps, workings and answers:

1) The Cash Flow is $ $ 4352000 per year for the years 1 to 10, consistent;

2) The NPV of this Project is 18031098.85

3) Daily should accept the Project as the Proejct NPV is significantly positive.

4) Assuming no other changes, if the Annual Revenues are $ 4097432.52, the NPV shall be at breakeven level.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;