Question

Market Top Investors, Inc., is considering the purchase of a $365,000 computer with an economic life of four years. The computer will be fully depreciated over four years using the straight-line method, at which time it will be worth $114,000. The computer will replace two office employees whose combined annual salaries are $95,000. The machine will also immediately lower the firm’s required net working capital by $84,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 24 percent. The appropriate discount rate is 9 percent.

  

Calculate the NPV of this project.

Answer 1

Time line		0	1	2	3	4
Cost of new machine		-365000
Initial working capital		84000
=Initial Investment outlay		-281000
							100.00%
Savings			95000	95000	95000	95000
-Depreciation	Cost of equipment/no. of years		-91250	-91250	-91250	-91250	0	=Salvage Value
=Pretax cash flows			3750	3750	3750	3750
-taxes	=(Pretax cash flows)*(1-tax)		2850	2850	2850	2850
+Depreciation			91250	91250	91250	91250
=after tax operating cash flow			94100.00	94100.00	94100	94100
reversal of working capital						-84000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					86640
+Tax shield on salvage book value	=Salvage value * tax rate					0
=Terminal year after tax cash flows						2640
Total Cash flow for the period		-281000	94100.00	94100.00	94100.00	96740
Discount factor=	(1+discount rate)^corresponding period	1	1.09	1.1881	1.295029	1.41158
Discounted CF=	Cashflow/discount factor	-281000	86330.27523	79202.08737	72662.46547	68533.1
NPV=	Sum of discounted CF=	25727.88