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Cash flows estimation and capital budgeting: You are the head of finance department in XYZ Company....

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 $11,000.00, and it would cost another $2,570.00 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 $1,850.00. The machine would require an increase in net working capital (inventory) of $860.00. The new machine would not change revenues, but it is expected to save the firm $26,235.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 36.00%.

If the project's cost of capital is 13.25%, 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

$11,000.00

$30,332.39

$18,961.87

$24,569.24

$13,570.00

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)

Solutions

Expert Solution

Time line 0 1 2 3
Cost of new machine -13570
Initial working capital -860
=a. Initial Investment outlay -14430
3 years MACR rate 33.33% 44.45% 14.81% 7.41%
Savings 26235 26235 26235
-Depreciation =Cost of machine*MACR% -4522.881 -6031.865 -2009.717 1005.54 =Salvage Value
=Pretax cash flows 21712.119 20203.135 24225.283
-taxes =(Pretax cash flows)*(1-tax) 13895.75616 12930.0064 15504.18112
+Depreciation 4522.881 6031.865 2009.717
=b. after tax operating cash flow 18418.64 18961.87 17513.89812
reversal of working capital 860
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 1184
+Tax shield on salvage book value =Salvage value * tax rate 361.99332
=c. Terminal year after tax cash flows 2405.99332
Total Cash flow for the period -14430 18418.64 18961.87 19919.89
Discount factor= (1+discount rate)^corresponding period 1 1.1325 1.28255625 1.452494953
Discounted CF= Cashflow/discount factor -14430 16263.69727 14784.43647 13714.25863
. NPV= Sum of discounted CF= 30332.39

jeff jeffy answered 4 days ago
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