Question

30. Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 20,000 dollars. It would be depreciated straight-line to 2,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,700 dollars. The system is expected to reduce costs by 6,300 dollars in year 1 and by 13,900 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 11.88 percent, what is the net present value of the new purification system project?

Answer 1

Operating cash flow (OCF) each year = incremental income after tax + depreciation

depreciation in each year = (cost of system - book value after 2 years) / depreciable life in years

depreciation in each year = ($20,000 - $2,000) / 2

depreciation in each year = $9,000

NPV is calculated using NPV function in Excel

NPV is -$1,857.81

NPV is -$1,857.81