Question

XYZ Company is considering purchasing a piece of equipment costing $400,000. It has a useful life of 4years and will be depreciated straight-line to zero, after which it will be scrapped for $30,000. This piece of equipment will save $150,000 per year in pretax operating costs during its useful life but requires an initial investment in NWC of $36,000. XYZ Company has a 21% tax rate and a required rate of return of 12%

What is the annual Operating Cash Flow (OCF) of this piece of equipment in Years 1-4?

What is the Year 4IATCF (Income After-Tax Cash Flow)?

What is the NPV of purchasing this piece of equipment?

Should XYZ Company take on this project?

What is the project's EAC?

Answer 1

As per rules I am answering the first 4 subparts of the question

1:

The Annual operating cash flows are as below
OCF		SL
Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
1-4	150000	100000	50000	10500	39500	139500

2: Year 4 ATCF =199200

3: NPV =

$25,650.66

4: Yes, since NPV is positive.

WORKINGS

Salvage
Purchase price	400000
Less: Depreciation	400000
Closing book value	0
Selling price	30000
Gain/(loss)	30000
Tax/ Saving	6300
Net salvage	23700

Finally the Net cash flows
Year	Initial cash flow	OCF	Working capital	Salvage	Net cash flows
0	-400000		-36000		-436000
1		$139,500.00			139500
2		$139,500.00			139500
3		$139,500.00			139500
4		$139,500.00	36000	23700	199200
				NPV	$25,650.66