Question

Photographic laboratories recover and recycle the silver used in photographic film. Stikine River Photo is considering purchase of improved equipment for their laboratory at Telegraph Creek. Here is the information they have:

The equipment costs $101,000 and will cost $80,800 per year to run.

It has an economic life of 10 years but can be depreciated over five years by the straight-line method.

It will recover an additional 5,000 ounces of silver per year. Silver is selling for $22 per ounce.

Over the past 5 years, the price of silver has appreciated by 4.5% per year in real terms.

Silver is traded in an active, competitive market.

Stikine's marginal tax rate is 34%.

Stikine's company cost of capital is 10% in real terms.

The nominal interest rate is 8%.

What is the NPV of the new equipment? Assume 2017 Tax Cuts and Jobs Act, where 100% write-off of investment expenditures, is not applicable.

Answer 1

Given,

Initial investment or cost of equipment = $ 101000

Cost of capital (r) = 10% or 0.10

Tax rate (t) = 34% or 0.34

Annual running cost = $ 80800

Economic life of equipment (n) = 10 years

Solution :-