FITCO is considering the purchase of new equipment. The equipment costs $355000, and an additional $112000...

FITCO is considering the purchase of new equipment. The equipment costs $355000, and an additional $112000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $268000, and it will have annual cash operating expenses of $82000. The equipment will be sold for $85000 after 5 years. An inventory investment of $75000 is required during the life of the investment. FITCO is in the 40 percent tax bracket, and its cost of capital is 9 percent. What is the project NPV?
Please show the formulas and do NOT use excel

Expert Solution

Answer:

Initial Investment = Cost of Equipment + Installation Cost
Initial Investment = $355,000 + $112,000
Initial Investment = $467,000

Useful Life = 5 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $467,000 / 5
Annual Depreciation = $93,400

Initial Investment in NWC = $75,000

Salvage Value = $85,000

After-tax Salvage Value = $85,000 * (1 - 0.40)
After-tax Salvage Value = $51,000

Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = ($268,000 - $82,000) * (1 - 0.40) + 0.40 * $93,400
Annual Operating Cash Flow = $111,600 + $37,360
Annual Operating Cash Flow = $148,960

Cost of Capital = 9%

NPV = -$467,000 - $75,000 + $148,960/1.09 + $148,960/1.09^2 + $148,960/1.09^3 + $148,960/1.09^4 + $148,960/1.09^5 + $75,000/1.09^5 + $51,000/1.09^5
NPV = -$542,000 + $148,960 * (1 - (1/1.09)^5) / 0.09 + $126,000/1.09^5
NPV = -$542,000 + $148,960 * 3.88965 + $126,000 * 0.64993
NPV = $119,293.44

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