Question

Progress Incorporated is considering buying a new machine to increase production. It will cost $200,000 to purchase, $10,000 to modify and $5,000 to have it installed. It has a five-year class life. At the end of three years they plan to sell the machine for $95,000. The new machine will allow Progress to increase revenues by $80,000 each year but expenses will increase by $5,000 each year. Inventory will decrease by $6,000 and wages payable will increase by $2,000 if the machine is purchased. Straight-line depreciation will be used. Progress’s marginal tax rate is 34% and its cost of capital is 7%. Should PI purchase the new machine? What is the NICO for the project? The Depreciation for year 1 is? The Operating Cash Flow in year 1 is? The firm has a _________of __________ when they sell the machine?

Answer 1

1:Yes , The machine should be purchased since NPV is positive.

2: NICO of the project = $215000

3: Depreciation every year= 215000/3 = $71666.67

4: OCf in year 1= $73866.67

5:The firm has a gain of $62700 when they sell the machine

WORKINGS

									Salvage
	Year	Initial cash flow	Working capital	OCF	After tax salvage	CF			Purchase price	215000
	0	-215000	8000			-207000			Less: Depreciation	215000
	1			$73,866.67		73866.66667			Closing book value	0
	2			$73,866.67		73866.66667
	3			$73,866.67	62700	136566.6667			Selling price	95000
									Gain/(loss)	95000
					NPV	$   38,031.36
					IRR	15.75%
	OCF
	Year	Sales	Costs	Depreciation	EBIT	Tax	PAT	OCF
	1	80000	-5000	-71666.6667	3333.333333	-1133.33333	2200	73866.66667
	2	80000	-5000	-71666.6667	3333.333333	-1133.33333	2200	73866.66667
	3	80000	-5000	-71666.6667	3333.333333	-1133.33333	2200	73866.66667