Question

In: Finance

"You are considering the purchase of a new machine for a project. Details of this potential...

"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%."

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago
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