Question

"You are considering the purchase of a new machine for a project. Details of this potential purchase are provided below. -The project life is 3 years. The machine costs $206,000. * You will pay cash for half of this machine immediately, and will borrow the remaining half at 5.6% annual rate compounded annually over 3 years. * The machine will be depreciated using a seven year MACRS approach. Annual O&M costs (expenses) of the machine are $22,000. Annual labor savings (revenues) are $122,000. Salvage value at the end of year 3 will be $61,000. Working capital requirement is initially $36,000. Any investment in working capital will be recovered at the end of the project. Assume an income tax rate and gains tax rate of 40%. Find the NPW of this project based on a MARR of 15.1%."

Answer 1

Installment = Loan amount/PVIFA(5.6%,3 years)

=206000*50%/2.6929

=103000/2.6929

=38248.47$

Repayment schedule

			Towards
Year	Opening balance	Installment	Int @ 5.6%	Principal	Closing balnce
1	103000.00	38248.47	5768.00	32480.47	70519.53
2	70519.53	38248.47	3949.09	34299.38	36220.15
3	36220.15	38248.47	2028.33	36220.14	0.0

Statement showing depreciation

Year	Opening balance	Depreciation rates	Depreciation	Closing balnce
1	203000	14.29%	29008.7	173991.3
2	173991.3	24.49%	49714.7	124276.6
3	124276.6	17.49%	35504.7	88771.9

Statement showing NPV

Particulars	0	1	2	3	NPV
Cash payment for machine	-103000
WC requirement	-36000.00
Annual labour savings		122000.00	122000.00	122000.00
Annual O&M costs		-22000.00	-22000.00	-22000.00
Interest		-5768.00	-3949.09	-2028.33
Depreciation		-29008.70	-49714.70	-35504.70
PBT		65223.3	46336.2	62467.0
TAX @ 40%		26089.32	18534.48	24986.79
PAT		39133.98	27801.72	37480.18
Add: Depreciation		29008.70	49714.70	35504.70
Annaul cash flow		68142.68	77516.42	72984.88
Repayment of principal		-32480.47	-34299.38	-36220.14
Release of WC				36000.00
Salvage value 61000 + 40%(88771.9-61000) 61000+40%*27771.9 61000+11108.76				72108.76
Total cash flow	-139000.00	35662.21	43217.05	144873.50
PVIF @ 15.1%	1.0000	0.8688	0.7548	0.6558
Present value	-139000	30983.6751	32621.539	95008.6147	19613.83