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You consider a new piece of equipment that will cost $400,000, and will require $20,000 for...

You consider a new piece of equipment that will cost $400,000, and will require $20,000 for shipping and installation. NWC will increase immediately by $25,000. The project will last 3 years and the equipment has a 5 year class life. Revenues will increase by $220,000/year, and defect costs will decrease by $220,000/year. Operating costs will increase by $30,000/year. The market value of the equipment after year 3 is $200,000. The cost of capital is 12%; marginal tax rate is 30%. What is the NPV?

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Expert Solution

Operating cashflows
Year1 YEar2 YEar3
Revenue generated 220000 220000 220000
savings in defects cpst 220000 220000 220000
Operating cost -30000 -30000 -30000
Depreciation -84000 -134400 -80640
(420000*20%) (420000*32%) (420000*19.20%)
Net Income before tax 326000 275600 329360
Less: tax @ 30% 97800 82680 98808
After tax Income 228200 192920 230552
Add: Dep 84000 134400 80640
Annual Operating cashflows 312200 327320 311192
After tax salvage:
Market value of FA 200000
Less: Book value of assets (420000*28.80%) 120960
Gain on sales 79040
tax on gain 23712
Net cash flows from Sales 55328
NPV:
Year0 Year1 Year2 Year3
Annual operating cashflows 0 312200 327320 311192
After tax salvage 55328
Release in NWC 25000
Investment in FA -420000
Investment in WC -25000
Netcashflows -445000 312200 327320 391520
PVF at 12% 1 0.892857 0.797194 0.71178
Present value of cashflows -445000 278750 260937.5 278676.2
NPV 373364

jeff jeffy answered 4 months ago
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