Question

Market Top Investors, Inc., is considering the purchase of a $335,000 computer with an economic life of four years. The computer will be fully depreciated over four years using the straight-line method, at which time it will be worth $90,000. The computer will replace two office employees whose combined annual salaries are $91,000. The machine will also immediately lower the firm’s required net working capital by $80,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 25 percent. The appropriate discount rate is 9 percent.

  

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4
Savings in salaries	-	$91,000	$91,000	$91,000	$91,000
Less: Depreciation	-	$83,750	$83,750	$83,750	$83,750
Savings before tax	-	$7,250	$7,250	$7,250	$7,250
Less: Taxes at 25%	-	$1,813	$1,813	$1,813	$1,813
Net Savings	-	$5,438	$5,438	$5,438	$5,438
Add back depreciation	-	$83,750	$83,750	$83,750	$83,750
Cash flow from operations	-	$89,188	$89,188	$89,188	$89,188
Initial investment	-$335,000	-	-	-	$68,250
Change in Net Working Capital	$80,000	-	-	-	-$80,000
Net cash flow	-$255,000	$89,188	$89,188	$89,188	$77,438
Discount rate	9.00%
NPV	25,618.52

Excel formulas used: