You have been asked by the president of your company to evaluate the proposed acquisition of...

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose machine. The machine's total price including installation and delivery is $90,000. The machine falls into the three-year class using straight-line depreciation method, and it will be sold after three years for $0. The use of this new machine will bring revenue of $40,000 for the first year, $45,000 for the second year, and $50,000 for the third year. The annual maintenance expense of $5,000 for the first year, $6,000 for the second year, and $7000 for the third year. The firm's marginal tax rate is 21 percent and the required rate of return is 10%.
a. What is the initial investment at t=0 ? (keep your number as a whole number: example of answer format:  $1,000 or if it's negative, then -$1,000.00)
b. What is the Cash Flow at year 1  ? ( keep your number as a whole number: example of answer format:  $1,000 or if it's negative, then -$1,000.00)
c. What is the Cash Flow at year 3  ? ( keep your number as a whole number: example of answer format:  $1,000 or if it's negative, then -$1,000.00)
d. What is NPV  ?  ( keep your number to two decimals: example of answer format:  $1,000.00 or if it's negative, then -$1,000.00)

Solutions

Expert Solution

a) Initial Outlay of the Project is -$90,000

b) Cash Flow in Year 1 is $33,949.37

c) Cash Flow in Year 3 is $38,169.58

d) NPV of the Project is $1,946.26

Calculation of NPV of the Project
Particulars	0	1	2	3
Initial Investment
Total Price of Machine (A)	-90000

Operating Cash Flows
Revenues (B)		40000	45000	50000
Maintenance Expenses (C )		5000	6000	7000
Depreciation (D) $90,000 * (33.33%, 44.45%, 14.81%)		29997	40005	13329
Profit Before Tax (E = B-C-D)		5003	-1005	29671
Tax @21% (F = E*21%)		1050.63	-211.05	6230.91
Profit After Tax (G = E-F)		3952.37	-793.95	23440.09
Depreciation (H = D)		29997	40005	13329
Operating Cash Flows (I = G+H)		33949.37	39211.05	36769.09

Terminal Value
Sale Value (J)				0
Unclaimed Depreciation (K) $90,000 * 7.41%)				6669
Loss on sale (L = J-K)				-6669
Tax rebate on loss (M = -L*21%)				1400.49

Total Cash Flows (N = A+I+M)	-90000	33949.37	39211.05	38169.58
Discount Factor@10% (O) 1/(1+10%)^n n=0,1,2,3	1	0.909090909	0.826446281	0.751314801
Discounted Cash Flows (P = N*O)	-90000	30863.06364	32405.82645	28677.3704
NPV of the Project	1946.26

jeff jeffy answered 1 year ago

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