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 $4.75 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?

$147,654
	$199,197
	$109,419
	$191,372
	$150,205

Answer 1

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Annual CF:

= PAT + Dep

Dep Per anum = [ Cost - Salvage Value ] / Useful life

= [ $ 8100000 - $ 1000000 ] / 5

= $ 7100000 / 5

= $ 1420000

Annual CF:

Particulars	Amount	Formula
Sales	$ 47,50,000.00	Given
Cost	$ 24,00,000.00	Given
Dep	$ 14,20,000.00	Calculated
PBT	$   9,30,000.00	Sales-Cost-Dep
Tax	$   2,79,000.00	PBT* Tax Rate
PAT	$   6,51,000.00	PBT - Tax
Cash Flow	$ 20,71,000.00	PAT + Dep

NPV:

Year	CF	PVF @11%	Disc CF
0	$ -81,00,000.00	1.0000	$ -81,00,000.00
1	$ 20,71,000.00	0.9009	$ 18,65,765.77
2	$ 20,71,000.00	0.8116	$ 16,80,870.06
3	$ 20,71,000.00	0.7312	$ 15,14,297.35
4	$ 20,71,000.00	0.6587	$ 13,64,231.85
5	$ 20,71,000.00	0.5935	$ 12,29,037.70
5	$ 10,00,000.00	0.5935	$     5,93,451.33
NPV	$    1,47,654.05

Option A is correct.

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