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 $238,000.
* You will pay cash for half of this machine immediately, and will borrow the remaining half at 9.3% 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 $18,000.
Annual labor savings (revenues) are $94,000.
Salvage value at the end of year 3 will be $47,000.
Working capital requirement is initially $22,000. Any investment in working capital will be recovered at the end of the project.
Assume an income tax rate and gains tax rate of 37%.
Find the NPW of this project based on a MARR of 15.4%."

Answer 1

	Machine cost	238000
	Loan value	119000	Half of the machine cost
	Rate of interest	9.30%
	Annual payment	47,263.08	Using PMT formula and payment in 3 years
	Year	0.00	1.00	2.00	3.00
1	Initial investment	-119,000.00
2	Working capital	-22000
3	revenue		94,000	94,000	94,000
4	O&M cost		18,000.00	18,000.00	18,000.00
5	Depreciation % using MACRS 7		14%	24%	17%
6	Depreciation value		34,010.20	58,286.20	41,626.20
7	Loan repayment		47,263.08	47,263.08	47,263.08
8	Salvage value				47,000.00
9	Working capital recovery				22,000.00
10	Profit before tax		-5,273.28	-29,549.28	56,110.72	3-4-6-7+8+9
11	Tax @ 37%		-1,951.11	-10,933.23	20,760.97	37%*10
12	Profit after tax		-3,322.17	-18,616.05	35,349.75	10-11
13	Net cash flow		43,940.91	28,647.03	82,612.83	Adding back depreciation
15	MARR	15.4%
16	NPW	-27,655.20	Using nPV formula with rate as 15.4% and above net cash flows