Question

Daily Enterprises is purchasing an $8 million machine. It will cost $100,000 to transport and install the machine. The machine has a depreciable life of five years using the straight-line depreciation and will have a market value of $1 million after the 5th year. The machine will generate incremental revenues of $5.0 million per year along with incremental costs of $2.4 million per year. Daily’s marginal tax rate is 30%, and the firm will run the project for 5 years. If the cost of capital is 11%, what is the NPV for this project?

Question 23 options:

	$796,987
	$845,979
	$838,154
	$794,436
	$907,411

Answer 1

Total cost of machine = $8000000+100000 =$8100000
Annual Depreciation = (Cost Of The Asstes- Salvage Value)/ Life Of The Asset
= $8100000-1000000/5 years
= $1420000 per year
Net Income = Revenue - cost -depreciation *(1- tax rate)
=$5000000-2400000-1420000*(1-0.30)
=$826000
Annual cash flow = Net Income + depreciation
=$826000+1420000
=2246000
Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.11^a	d=b*c
0	$   -81,00,000	1	$   -81,00,000.00
1	$     22,46,000	0.900901	$     20,23,423.42
2	$     22,46,000	0.811622	$     18,22,903.99
3	$     22,46,000	0.731191	$     16,42,255.84
4	$     22,46,000	0.658731	$     14,79,509.77
5	$     32,46,000	0.593451	$     19,26,343.01
	NPV		$             7,94,436