In: Finance

# Market Top Investors, Inc., is considering the purchase of a $365,000 computer with an economic life... Market Top Investors, Inc., is considering the purchase of a$365,000 computer with an economic life of four years. The computer will be fully depreciated over four years using the straight-line method, at which time it will be worth $114,000. The computer will replace two office employees whose combined annual salaries are$95,000. The machine will also immediately lower the firm’s required net working capital by $84,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 24 percent. The appropriate discount rate is 9 percent. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Please help figure out where I am making a mistake:  Streight line Method depreciation: Accumulated Depreciation = Cost of Asset/Economic Life Year 0 1 2 3 4 Savings in annual cost before tax)$95,000 $95,000$95,000 $95,000 Depreciation Exense ($91,250) ($91,250) ($91,250) ($91,250) Net Savings before tax$3,750 $3,750$3,750 $3,750 Less Tax$2,850 $2,850$2,850 $2,850 After Tax Savings$900 $900$900 $900 Initial Investemetn ($365,000) After Tax Salvage Value $86,640.00 Working Capital$84,000 ($84,000) Add back depreciation expense$91,250 $91,250$91,250 $91,250 Net Cash Flow ($281,000) $92,150.00$92,150 $92,150$94,790 PV Factor @9% 1 0.917431193 0.841679993 0.77218348 0.77218348 PV ($281,000)$         84,541.28 $77,560.81$71,156.71 $73,195.27 NPV$25,454.08

## Solutions

##### Expert Solution

 Time line 0 1 2 3 4 Cost of new machine -365000 Initial working capital 84000 =Initial Investment outlay -281000 100.00% Savings 95000 95000 95000 95000 -Depreciation Cost of equipment/no. of years -91250 -91250 -91250 -91250 0 =Pretax cash flows 3750 3750 3750 3750 -taxes =(Pretax cash flows)*(1-tax) -900 -900 -900 -900 +Depreciation 91250 91250 91250 91250 =after tax operating cash flow 94100 94100 94100 94100 reversal of working capital -84000 +Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 86640 +Tax shield on salvage book value =Salvage value * tax rate 0 =Terminal year after tax cash flows 2640 Total Cash flow for the period -281000 94100 94100 94100 96740 Discount factor= (1+discount rate)^corresponding period 1 1.09 1.1881 1.295029 1.4115816 Discounted CF= Cashflow/discount factor -281000 86330.27523 79202.087 72662.465 68533.055 NPV= Sum of discounted CF= 25727.88

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