Question

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.98 million and will last for six years. Variable costs are 33% of sales, and fixed costs are $2008914 per year. Machine B costs $5.12 million and will last for nine years. Variable costs for this machine are 24% of sales and fixed costs are $1360332 per year. The sales for each machine will be $9.9 million per year. The required return is 9 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for machine B.

Answer 1

Renegade Industries
Since we need to calculate the EAC for each Machine, sales are irrelevant.
EAC only uses the cost of operating the equipment, not the sales.
Using the bottom up approach, or net income plus depreciation, to calculate
net cash Outflow, we get:
Calculation of NPV of Machine B
A	Sales	$        99,00,000
B=A*24%	Variable Cost 24% of Sales	$        23,76,000
C=B	Variable Cost	$       -23,76,000
D	Fixed Cost	$       -13,60,332
E = G	Depreciation	$         -5,68,889
F=C+D+E	Gross Profit	$       -43,05,221
G=F*38%	Tax @ 38%	$ -16,35,983.94
H=F-G	Net Profit	$       -26,69,237
E=G	Depreciation	$          5,68,889
I=H+E	Net Cash Outflow	$      -21,00,348
F	Machinery Cost	$        51,20,000
G=F/9 Years	Depreciation on SLM Basis	$          5,68,889
Year	Cash Inflow/Outflow	PV Factor @ 9 %	PV Amount		Calculation of PV Factor
A	B	C=F	D=B*C		F
0	$                         -51,20,000	1.0000	$    -51,20,000		1/(1.09)^0
1	$                         -21,00,348	0.9174	$    -19,26,925		1/(1.09)^1
2	$                         -21,00,348	0.8417	$    -17,67,821		1/(1.09)^2
3	$                         -21,00,348	0.7722	$    -16,21,854		1/(1.09)^3
4	$                         -21,00,348	0.7084	$    -14,87,940		1/(1.09)^4
5	$                         -21,00,348	0.6499	$    -13,65,082		1/(1.09)^5
6	$                         -21,00,348	0.5963	$    -12,52,369		1/(1.09)^6
7	$                         -21,00,348	0.5470	$    -11,48,962		1/(1.09)^7
8	$                         -21,00,348	0.5019	$    -10,54,094		1/(1.09)^8
9	$                         -21,00,348	0.4604	$       -9,67,059		1/(1.09)^9
		NPV	$ -1,77,12,105
Hence NPV of Machinery B is $ -17712105
This solution is provided with detailed explanation. Please Discuss in case of Doubt.
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