FITCO is considering the purchase of new equipment. The equipment costs $337000, and an additional $114000...

FITCO is considering the purchase of new equipment. The equipment costs $337000, and an additional $114000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $260000, and it will have annual cash operating expenses of $85000. The equipment will be sold for $85000 after 5 years. An inventory investment of $71000 is required during the life of the investment. FITCO is in the 40 percent tax bracket, and its cost of capital is 10 percent. What is the project NPV?

$55788.

$71818.

$88557.

$40428.

Expert Solution

	Year	0	1	2	3	4	5

A	Initial investment	-451000
B	Working capital	-71000					71000


i	Revenue		260000	260000	260000	260000	260000
ii	Cost		85000	85000	85000	85000	85000
iii	depreciation		90200	90200	90200	90200	90200
iv=i-ii-iii	Profit before tax		84800	84800	84800	84800	84800
v=iv*40%	Tax @ 40%		33920	33920	33920	33920	33920
vi=iv-v	Net income		50880	50880	50880	50880	50880
vii=vi+iii	Operating cash flow	141080	141080	141080	141080	141080

viii	Post tax salvage value					51000
	85000*(1-40%)

ix=A+B+vii+viii	net cash flow	-522000	141080	141080	141080	141080	263080
x	PVIF @ 10%	1.0000	0.9091	0.8264	0.7513	0.6830	0.6209
xi=ix*x	Present value	(522,000)	128,255	116,595	105,995	96,360	163,352	88,557

	NPV =	88,557

	Ans =	$ 88,557

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