Question

Tech Mfg. is thinking about replacing an existing drill press. The existing press was
purchased 2 years ago for $78,000 with a salvage value of $9,000. It will last for three more
years and then will be scrapped. It can be sold today for $37,000. A new press can be
purchased for $95,000 with an expected salvage value of $10,500 at the end of its three-year
life. The new press will decrease labor costs by $18,000 per year. Sales generated by this drill
press are expected to increase by $350,000 per annum growing at 6% per annum. Press has a
gross profit margin of 20%.

The Press uses 11% for its cost of capital and has an ordinary income
tax rate of 25%. The project will be financed with a 9% 3-year loan. Press has an average
collection period of 70 days, 25 days of inventory, and 35 days of payables. The firm uses
straight-line depreciation for all long-term assets.

What is the NPV of the project?

Answer 1

Particulars	Year-1	Year-2	Year-3
Additional Sale Proceeds	$ 3,50,000.00	$ 3,71,000.00	$ 3,93,260.00
Gross Profit	$    70,000.00	$    74,200.00	$    78,652.00
Add: Savings in Labour Cost	$    18,000.00	$    18,000.00	$    18,000.00
Less: Depreciation	$    28,166.67	$    28,166.67	$    28,166.67
Less: Loss on sale of Existing Press	$    13,400.00
Less: Interest Expense	$      8,550.00	$      8,550.00	$      8,550.00
Net Income before Tax	$    37,883.33	$    55,483.33	$    59,935.33
Less: Tax @ 25%	$      9,470.83	$    13,870.83	$    14,983.83
Net Income	$    28,412.50	$    41,612.50	$    44,951.50
Add: Depreciation	$    28,166.67	$    28,166.67	$    28,166.67
Add: Sale Proceeds	$    37,000.00		$    10,500.00
Net Cash Flow	$    93,579.17	$    69,779.17	$    83,618.17
PV Factor @ 11%	0.9009	0.8116	0.7312
Present Value of Cash Flow	$    84,305.56	$    56,634.34	$    61,140.88

Year	PV of Cashflow
Year-0	$ (95,000.00)
Year-1	$    84,305.56
Year-2	$    56,634.34
Year-3	$    61,140.88
NPV	$ 1,07,080.78