Question

ABC Company is considering the acquisition of a new piece of equipment to
replace an old, outdated machine currently used in its business operations.
The new equipment would cost $135,000 and is expected to last 9 years. The
new equipment would require a repair of $25,000 in year four and another
repair costing $80,000 in year eight. Purchasing this new equipment would
require an immediate investment of $30,000 in working capital which would
be released for investment elsewhere at the end of the 9 years. The new
equipment is expected to have a $10,000 salvage value at the end of nine
years. The new equipment is expected to generate a cost savings of $60,000
per year. ABC Company has a cost of capital of 16% and an income tax rate
of 40%.

Calculate the net present value (NPV) of the new equipment. If your answer
is negative, place a minus sign in front of your answer with no spaces in
between (e.g., -1234).

Answer 1

Answer to question

Cash Outflow	New equipment	₹    1,35,000.00
		Working Capital	₹        30,000.00
				₹    1,65,000.00
Present Value of Cash Inflow	Note 1	₹    1,74,812.78
Net Present Value		₹          9,812.78

Note 1 Cash Inflow
Year	Saving in Cost	Repair Cost	Depreciation	Profit Before Tax	Tax	Profit After Tax	Add Depreciation	Cash Inflow	Discount Factor	Present Value
1	60000.00	0.00	13888.89	46111.11	18444.44	27666.67	13888.89	41555.56	0.862069	$     35,823.76
2	60000.00	0.00	13888.89	46111.11	18444.44	27666.67	13888.89	41555.56	0.743163	$     30,882.55
3	60000.00	0.00	13888.89	46111.11	18444.44	27666.67	13888.89	41555.56	0.640658	$     26,622.89
4	60000.00	25000.00	13888.89	21111.11	8444.444	12666.67	13888.89	26555.56	0.552291	$     14,666.40
5	60000.00	0.00	13888.89	46111.11	18444.44	27666.67	13888.89	41555.56	0.476113	$     19,785.14
6	60000.00	0.00	13888.89	46111.11	18444.44	27666.67	13888.89	41555.56	0.410442	$     17,056.16
7	60000.00	0.00	13888.89	46111.11	18444.44	27666.67	13888.89	41555.56	0.35383	$     14,703.58
8	60000.00	80000.00	13888.89	-33888.89	-13555.6	-20333.33	13888.89	-6444.44	0.305025	$     -1,965.72
9	60000.00	0.00	13888.89	46111.11	18444.44	27666.67	13888.89	41555.56	0.262953	$     10,927.16
Net Release of Salvage Value and Working Capital Note 3	24000.00	0.262953	$       6,310.87
Present Value of Cash Inflow	$ 1,74,812.78

Note 2			Note 3
Depreciation			Capital gain Tax on release of
Asume SLM			Salvage Value			$ 10,000.00
Cost	$   1,35,000.00		Working Capital			$ 30,000.00
Salvage Value	$      10,000.00					$ 40,000.00
	$   1,25,000.00		Tax @40%			$ 16,000.00
Years	9		Net Release of Salvage Value and Working Capital			$ 24,000.00
Depreciation	$      13,888.89