Question

Cash flows estimation and capital budgeting:
You are the head of finance department in XYZ Company. You are considering adding a new machine to your production facility. The new machine’s base price is $10,300.00, and it would cost another $2,370.00 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after three years for $1,650.00. The machine would require an increase in net working capital (inventory) of $770.00. The new machine would not change revenues, but it is expected to save the firm $24,185.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 32.00%.

If the project's cost of capital is 12.10%, what is the NPV of the project?

Round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72.

Group of answer choices

$10,300.00

$12,670.00

$18,247.98

$30,614.46

$29,696.03

a. What is the initial cash outlay? (4 pts.)
b. What is the free cash flow for year 1? (4 pts)
c. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital – also called terminal value)? (4 pt)

Answer 1

Time line		0	1	2	3
Cost of new machine		-12670
Initial working capital		-770
=a. Initial Investment outlay		-13440
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Savings			24185	24185	24185
-Depreciation	=Cost of machine*MACR%		-4222.911	-5631.815	-1876.427	938.847	=Salvage Value
=Pretax cash flows			19962.089	18553.185	22308.573
-taxes	=(Pretax cash flows)*(1-tax)		13574.22052	12616.1658	15169.82964
+Depreciation			4222.911	5631.815	1876.427
=b. after tax operating cash flow			17797.13	18247.98	17046.25664
reversal of working capital					770
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				1122
+Tax shield on salvage book value	=Salvage value * tax rate				300.43104
=c. Terminal year after tax cash flows					2192.43104
Total Cash flow for the period		-13440	17797.13	18247.98	19238.69
Discount factor=	(1+discount rate)^corresponding period	1	1.121	1.256641	1.408694561
Discounted CF=	Cashflow/discount factor	-13440	15876.12089	14521.23622	13657.10368
. NPV=	Sum of discounted CF=	30614.46