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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 $2.92 million and will last for six years. Variable costs are 32% of sales, and fixed costs are $2,033,463 per year. Machine B costs $5.05 million and will last for nine years. Variable costs for this machine are 21% of sales and fixed costs are $1,281,839 per year. The sales for each machine will be $10.2 million per year. The required return is 11 %, 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 A. (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
Cost of new machine -2920000
=Initial Investment outlay -2920000
100.00%
Sales 10200000 10200000 10200000 1E+07 10200000 10200000
Profits Sales-variable cost 3366000 3366000 3366000 3366000 3366000 3366000
Fixed cost -2033463 -2033463 -2033463 -2E+06 -2033463 -2033463
-Depreciation Cost of equipment/no. of years -486666.6667 -486666.6667 -486666.6667 -486667 -486666.7 -486666.7 0 =Salvage Value
=Pretax cash flows 845870.3333 845870.3333 845870.3333 845870 845870.33 845870.33
-taxes =(Pretax cash flows)*(1-tax) 524439.6067 524439.6067 524439.6067 524440 524439.61 524439.61
+Depreciation 486666.6667 486666.6667 486666.6667 486667 486666.67 486666.67
=after tax operating cash flow 1011106.27 1011106.27 1011106.273 1011106 1011106.3 1011106.3
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -2920000 1011106.27 1011106.27 1011106.27 1011106 1011106.3 1011106.3
Discount factor= (1+discount rate)^corresponding period 1 1.11 1.2321 1.367631 1.51807 1.6850582 1.8704146
Discounted CF= Cashflow/discount factor -2920000 910906.5526 820636.5338 739312.1926 666047 600042.36 540578.7
NPV= Sum of discounted CF= 1357523.36

jeff jeffy answered 8 months ago
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