Question

Overnight Laundry is considering the purchase of a new pressing machine that would cost $111,360 and would produce incremental operating cash flows of $29,000 annually for 10 years. The machine has a terminal value of $6,960 and is depreciated for income tax purposes using straight-line depreciation over a 10-year life (ignore the half-year convention). Overnight Laundry's marginal tax rate is 33.3%. The company uses a discount rate of 18%.

What is the net present value of the project?

Answer 1

Solution: NPV = 35922.09

Net Present Value by discounting of cash flows @ 18%
Year	Discounting Factor	Cash Flows	Present Value
Year 0	1.0000	(111,360.00)	(111,360.00)
Year 1	0.8475	32,476.52	27,522.47
Year 2	0.7182	32,476.52	23,324.13
Year 3	0.6086	32,476.52	19,766.21
Year 4	0.5158	32,476.52	16,751.03
Year 5	0.4371	32,476.52	14,195.79
Year 6	0.3704	32,476.52	12,030.33
Year 7	0.3139	32,476.52	10,195.19
Year 8	0.2660	32,476.52	8,639.99
Year 9	0.2255	32,476.52	7,322.03
Year 10	0.1911	39,436.52	7,534.92
Net Present Value		35,922.09

Workings:

Particular	Cash flow	Year
Cost of Machine	(111,360.00)	Year 0
Cash flows on use of machine	29,000.00	Year 1 - 10
Tax savings on depreciation of Machine	3,476.52	Year 1 - 10
Terminal value	6,960.00	Year 10
Cost of Machine	111,360.00
Terminal value	6,960.00
Depreciable value	104,400.00	A
Useful Life	10.00	B
Depreciaiton	10,440.00	C=A/B
Tax savings @ 33.3%	3,476.52	C*33.3%