Question

Q4) Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $66,263.00 seven years ago. The old equipment currently has no market value. The new equipment cost $59,022.00 . The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $33,912.00 . The new equipment is expected to save the firm $22,506.00 annually by increasing efficiency and cost savings. The corporation has tax rate of 34.24% and a required return on capital of 13.09% .

a) What is the total initial cash outflow? (show as negative number)

b) What are the estimated annual operating cash flows?

c) What is the terminal cash flow?

d) What is the NPV for this project?

Answer 1

Equip ment cost =	$59,022
intellation cost =	$0
Cost capitalised =	59,022.00
Life of machine(years) =	4
Depreciation =	600000/4
	14,755.50

A) Initial cash outflow:

  

	Cost of equipment	59,022.00
	Initial cash out flow	( 59022.00)

B) Annual Cash flows :

	Cost savings	22,506.00
Less
	Profit before DEP	22,506.00
Less	Depreciation	$14,755.50
	Net profit	7,750.50
Less	Tax @ 34.24%	2,653.77
	Profit after tax	5,096.73
Add	Depreciation	14,755.50
	CASh Inflow	19,852.23

C) Terminal cash flow :

  

	Salvage value	$      33,912.00
Less	Tax @ 34.24%	$      11,611.47
	Taerminal cash flow	$      22,300.53

D) NPV of the project :

Year	Cash flow	PVF @13.09%	PV
0	$ (59,022.00)	1	$ (59,022.00)
1	$    19,852.23	0.8842	$   17,553.34
2	$    19,852.23	0.7819	$   15,522.46
3	$    19,852.23	0.6913	$   13,723.85
4	$    19,852.23	0.6113	$   12,135.67
4	$    22,300.53	0.6113	$   13,632.31
	NPV	$   13,545.63

NPV = $ 13546

Note : PVF @ 13.09 = 1/ 1.1309^n where n = year