Question

X Company is considering the purchase of a new processor that costs $200,000. Shipping and setup costs for the processor are estimated to be $15,000. X’s working capital requirement is expected to increase by $17,000 when the new processor begins operation and is expected to be fully recoverable at the end of the project. The processor’s useful life is expected to be 5 years and its salvage value at that point is estimated to be $25,000. Estimated revenues and expenses before tax for each year are shown in the table below.

Year	Revenues	Cash operating expenses
1	$87,000	$23,000
2	$82,000	$25,000
3	$93,000	$30,000
4	$87,000	$23,000
5	$88,000	$29,000

The processor will be depreciated to a zero book value using the following annual depreciation rates that are applied to the original installed cost.

Year	Depreciation %
1	15
2	22
3-5	21

Assume a tax rate of 35% and a cost of capital of 12%. Show the calculations for the initial outlay and the CFAT for each year. Then use your financial calculator to find the NPV and IRR for the project. Based on the NPV and IRR, should company X invest in the new processor?

Check Answers: Initial Investment: $232,000, NPV = -$15,574

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

NO INTERMEDIATE ROUNDING IS DONE.