Question

Talia’s Tutus is considering purchasing a new sewing machine. The old machine it has right now was bought 2 years ago for $30,000, with an assume life of 5 years and an assume salvage value of $5,000. The firm uses straight-line depreciation. The old machine can be sold for $25,000. The new machine can be purchased today for $40,000. The new machine will have a 5-year life and will be depreciated to $5,000 using straight-line depreciation. With the new sewing machine, the firm is expected to have additional revenue of $15,000 for each of the next five years. The variable cost is 40% of the revenue, and the fixed cost is $3,000 each year. Suppose Talia’s Tutus allows its customers to pay their bills with an average 3-month delay, and its inventories are 15% of next year’s expense. If the opportunity cost of capital is 12%, corporate tax rate is 35%, and capital gain tax is 15%, what are the project’s NPV and IRR? please post step by step

Answer 1

Capital gain tax is just paidin current year time ., Machine purchase at start of year , revenue generated at end of year.

		(2) yrs	(1) yrs	0yr	1 yr	2yr	3yrs	4yr	5yr
Old machine
	Cost of machine	$30,000
	Depreciation	($5,000)	($5,000)
	Book value	$25,000	$20,000
				$20,000
	Selling price			$25,000
	Profit from sell of machine			$5,000
New machine
	Cost			$40,000
	addition cost required ( selling price- cash received from sells of old machine			($15,000)
	Inventory (@15% of total expanses )			($1,350)
	Additional cost in Bill for 3months	15000/12*3 months		($3,750)
	Net cash outflow			($20,100)
			Revenue		$15,000	$15,000	$15,000	$15,000	$15,000
			Fixed cost		($3,000)	($3,000)	($3,000)	($3,000)	($3,000)
			Variablecost (@40% of revenue)		($6,000)	($6,000)	($6,000)	($6,000)	($6,000)
			Net operating income		$6,000	$6,000	$6,000	$6,000	$6,000
		Income tax purpose
			Depreciation		($5,000)	($5,000)	($5,000)	($5,000)	($5,000)
			Taxable income		$1,000	$1,000	$1,000	$1,000	$1,000
			Capital gain tax		($750)	$0	$0	$0	$0
			Income tax		($350)	($350)	($350)	($350)	($350)
		Net income after tax			$4,900	$5,650	$5,650	$5,650	$5,650
		PV			$4,375.000	$4,504.145	$4,021.558	$3,590.677	$3,205.962
		NPV	($402.657)			Cost of capital	12.00%
						Incometax	35%
		IRR	11.21%			Capitalgain tax	15%