Question

Pierce Labs, located in Gaspe Bay, purchased a radio communication system three years ago for $310,000. It has a potential buyer for the system that is willing to pay $85,000. A new system will cost $390,000 and is eligible for a 15 percent ITC.

It is estimated the new system would provide the following stream of cost savings over the next five years:

Year	Cost savings
1	$99,000
2	88,000
3	77,000
4	66,000
5	55,000

The tax rate is 30 percent, and the estimated cost of capital is 12 percent.

Calculate the NPV. (Do not round the intermediate calculations. Round the final answer to the nearest whole dollar. Negative answer should be indicated by a minus sign. Omit $ sign in your response.)

NPV           $

Should the new system be purchased?

• Yes

• No

• Please provide correct answers.

Answer 1

	Pierce Labs
	Since nothing has been mentioned about depreciation , ignoring any
	depreciation related calculation for the new machine.
	Cash flow details
	Details	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	New System cost	$         (390,000)
	15% ITC available =	$             58,500
	Sale Proceeds from old machine	$             85,000
a	Net Initial Investment	$         (246,500)

	Cash flow from operations
	Incremental sales revenue due to redcued operating cost		$            99,000	$            88,000	$         77,000	$           66,000	$         55,000
	Less Tax @30%		$            29,700	$            26,400	$         23,100	$           19,800	$         16,500
b	Net Cash flow from Operations		$            69,300	$            61,600	$         53,900	$           46,200	$         38,500
c	Total Cash flows=a+b=	$         (246,500)	$            69,300	$            61,600	$         53,900	$           46,200	$         38,500
d	Discount rate @12%=1/1.12^n	1	0.893	0.797	0.712	0.636	0.567
e	PV of Cash flows=c*d=	$         (246,500)	$            61,885	$            49,095	$         38,377	$           29,383	$         21,830
f	NPV =Sum of PV of Cash flows=	$           (45,930)

As the NPV of the new machine is negative , it should not be purchased.
Pls note , if we have the depreciation details, it will impact the NPV calculation and NPV will become positive
but the depreciation aspect not clarified , so ignore from NPV aclculation.