Question

In: Accounting

Overnight Laundry is considering the purchase of a new pressing machine that would cost $111,360 and...

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?

* While calculating depreciation for taxation purposes, please ignore salvage value of the machine and calculate the depreciation on the original value of the machine.

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Expert Solution

Answer :

Determination of Annual cashinflow

Particulars Amount ($)
Incremental cash inflow 29,000
Less : Depreciation expense (111360 -6960)/10 (10,440)
Income tax before tax 18,560
Less : Income tax @33.3% (6,180)
Net income 12,380
Add : Depreciation expense 10,440
Annual operating cash inflow 22,820

Terminal after tax cash inflow is = 6960*(1-0.333)

Terminal after tax cash inflow is = $4,642.32

Initail cash outflow is $111,360

Determination of Net present value

Year Flows ($) Factor @18% Value ($)
0 (1,11,360) 1.0000 -1,11,360.00
1 22,820 0.8475 19,338.98
2 22,820 0.7182 16,388.97
3 22,820 0.6086 13,888.96
4 22,820 0.5158 11,770.30
5 22,820 0.4371 9,974.83
6 22,820 0.3704 8,453.25
7 22,820 0.3139 7,163.77
8 22,820 0.2660 6,070.99
9 22,820 0.2255 5,144.91
10 22,820 0.1911 4,360.09
10 4,642 0.1911 886.92
- - Net present vaue -7,918.03

Net present value of th e project is -$7,918/-


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