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Renegade Industries is considering the purchase of a new machine for the production of latex. Machine...

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.96 million and will last for six years. Variable costs are 34% of sales, and fixed costs are $2,061,224 per year. Machine B costs $5.12 million and will last for nine years. Variable costs for this machine are 21% of sales and fixed costs are $1,400,231 per year. The sales for each machine will be $9.6 million per year. The required return is 12 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for machine B. (Round answer to 2 decimal places. Do not round intermediate calculations)

Topic: Capital Budgeting Problem

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Expert Solution

Time line 0 1 2 3 4 5 6 7 8 9
Cost of new machine -5120000
=Initial Investment outlay -5120000
100.00%
Sales 9600000 9600000 9600000 9600000 9600000 9600000 9600000 9600000 9600000
Profits Sales-variable cost 7584000 7584000 7584000 7584000 7584000 7584000 7584000 7584000 7584000
Fixed cost -1400231 -1400231 -1400231 -1E+06 -1400231 -1400231 -1400231 -1400231 -1400231
-Depreciation Cost of equipment/no. of years -568888.8889 -568888.8889 -568888.8889 -568889 -568888.9 -568888.9 -568888.889 -568888.9 -568889 0 =Salvage Value
=Pretax cash flows 5614880.111 5614880.111 5614880.111 5614880 5614880.1 5614880.1 5614880.111 5614880.1 5614880
-taxes =(Pretax cash flows)*(1-tax) 3481225.669 3481225.669 3481225.669 3481226 3481225.7 3481225.7 3481225.669 3481225.7 3481226
+Depreciation 568888.8889 568888.8889 568888.8889 568889 568888.89 568888.89 568888.8889 568888.89 568888.9
=after tax operating cash flow 4050114.56 4050114.56 4050114.558 4050115 4050114.6 4050114.6 4050114.558 4050114.6 4050115
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -5120000 4050114.56 4050114.56 4050114.56 4050115 4050114.6 4050114.6 4050114.558 4050114.6 4050115
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928 1.57352 1.7623417 1.9738227 2.210681407 2.4759632 2.773079
Discounted CF= Cashflow/discount factor -5120000 3616173.712 3228726.529 2882791.544 2573921 2298143.8 2051914.1 1832066.142 1635773.3 1460512
NPV= Sum of discounted CF= 16460022.05

jeff jeffy answered 6 hours ago
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