Question

CCNY, Inc. is considering the acquistition of a new left-handed press. The base price of the press is indicated below. In addition there are modification costs, noted below, for CCNY's special use. The press falls into the MACRS 3-year class. The new press is expected to speed up production and result in an increase in gross annual sales and an increase in annual variable costs as noted below. Inventories, accounts payable, and accounts receivable are all expected to increase (as noted) to support the heightened activity. The press is expected to be sold after three years for the given salvage value. The tax rate and appropriate discount rate are noted. Find the NPV of this project and indicate if the press should be purchased. Base Price $3,853,422 modification costs $45,540 Variable cost increase $1,366,200 Gross Sales increase $2,732,400 Salvage Value $1,150,831 Accounts receivable change $204,930 Inventory Change $54,648 Accounts payable change $282,348 Discount rate 12% Tax rate 30% NPV Purchase (yes or no)

Answer 1

This is a relatively easy one. To compute NPV, you first must calculate the outflow in the present day. The calculation of Initial costs is given below:

Initial Costs
Price	$3,853,422
Modification Costs	$45,540
Less: Salvage Value	($1,150,831)
Depreciable Cost of Press	$2,748,131
Net increase/(decrease) in working capital	($22,770)
Net initial costs of the press	$2,725,361

You may note that while the initial cost is different, depreciation will be available for only $2,748,131 as increase in working capital is not recognized by tax laws as a depreciatiable expenditure (albeit this press actually involves release of working capital). For the sake of your understanding, the working capital calculation has been given below as well:

Working Capital increase
Accounts Receivable increase	$204,930
Inventory increase	$54,648
Accounts payable increase	($282,348)
Net increase	($22,770)

Since accounts payable represent deferral of liabilities, it has been subtracted from the additional expenditure on working capital. Now just one more calculation before we compute the actual NPV, and that is depreciation. It's calculated below. However please note that it's calculated only as a percentage of the depreiciable cost shown above already.

Schedule of Depreciation
Year	Rate	Depreciation
1	33.33%	915,952.06
2	44.45%	1,221,544.23
3	14.81%	406,998.20

With that out of the way, let's look at the NPV of the asset.

Calculation of NPV
Years	1	2	3
Incremental Sales	$2,732,400	$2,732,400	$2,732,400
Incremental Costs	($1,366,200)	($1,366,200)	($1,366,200)
Incremental EBITDA	$1,366,200	$1,366,200	$1,366,200
Less: Depreciation	($915,952)	($1,221,544)	($406,998)
Less: Interest Cost	-	-	-
Profit before tax	$450,248	$144,656	$959,202
Tax cost @ 30%	$135,074.38	$43,396.73	$287,760.54
Profit after tax	$315,173.56	$101,259.04	$671,441.26
Scrap Value received	$0.00	$0.00	$1,150,831.00
Total Cash Flows	$315,173.56	$101,259.04	$1,822,272.26
Discounting factor@12%	0.8929	0.7972	0.7118
Discounted Cash flows	$281,404.96	$80,723.09	$1,297,057.40
Total discounted cash flows	$1,659,185.45
Initial Costs	($2,725,361.00)
NPV	($1,066,175.55)

Since the initial cost is shown as a negative number, we just add the initial costs and discounted cash flows to get the NPV for the press. As you can see here, the NPV here is negative which implies the project will be unable to even recover its costs. I'm afraid we're gonna have to say 'No' to the press. The proposal is to be rejected.

Hope that helps! I'll be happy to answer your queries in the comments section!