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A new electronic process monitor costs $690,000. This cost could be depreciated at 30 percent per...

A new electronic process monitor costs $690,000. This cost could be depreciated at 30 percent per year (Class 10). The monitor would actually be worth $101,000 in five years. The new monitor would save $460,000 per year before taxes and operating costs. If we require a 12.5% return, what is the NPV of the purchase?Assume a tax rate of 25%

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Expert Solution

NPV = Present value of cash inflows - cash initial outflow

Calculation of present value of cash inflows

Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Savings before taxes and operating costs      460,000.00      460,000.00      460,000.00     460,000.00      460,000.00
Less: Depreciation (W-1) (207,000.00) (144,900.00) (101,430.00)     (71,001.00)      (49,700.70)
Profit before tax      253,000.00      315,100.00      358,570.00     388,999.00      410,299.30
Less: Tax @ 25%      (63,250.00)      (78,775.00)      (89,642.50)     (97,249.75) (102,574.83)
Profit after tax      189,750.00      236,325.00      268,927.50     291,749.25      307,724.48
Add: Depreciation (W-1)      207,000.00      144,900.00      101,430.00       71,001.00        49,700.70
Add: Proceeds from sale of monitor after tax(W-2)      104,742.08
Cash inflow      396,750.00      381,225.00      370,357.50     362,750.25      462,167.25
PVF @ 12.5%     0.88888889     0.79012346     0.70233196    0.62429508     0.55492896
P.V. of cash inflow      352,666.67      301,214.81      260,113.91     226,463.20      256,469.99

NPV = sum of present value of cash inflows - initial outflow = $1,396,928.58 - $690,000 = +$706,928.58

W-1 Calculation of annual depreciation

Year Book value Depreciation @ 30%
1 690000 207000
2 483000 144900
3 338100 101430
4 236670 71001
5 165669 49700.7
574031.7

W-2 Calculation of net proceeds after tax

Book value at end of year 5 = cost - sum of depreciation of 5 years = $690,000 - $574,031.7 = $115,968.3

Loss on sale =  $115,968.3 - $101,000 = $14968.3

Tax saving on loss = $14968.3 * 25% = 3472.08

net proceeds = $101,000 + $3472.08 = $104,742.08

jeff jeffy answered 1 week ago
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