Question

In: Finance

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
Next > < Previous

Related Solutions

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 truck. The truck's basic price is $265,000, and it will cost another $35,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, and it will be sold after three years for $45,000. Use of the truck will require an increase in net operating working capital (spare parts inventory) of $20,000. The truck will...
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 truck for $410,000. The truck falls into the MACRS 3-year class, and it will be sold after 3 years for $66,000. Use of the truck will require an increase in NWC (spare parts inventory) of $6,600. The truck will have no effect on revenues, but it is expected to save the firm $120,000 per year in before-tax operating costs, mainly labor....
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 spectrometer for the firm’s R&D department. The equipment’s basic price is $70,000 and it would cost another $15,000 to modify it for special use by your firm. The spectrometer, which has a MACRS 3-year recovery period, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The...
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 truck for $50,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $21,000. Use of the truck will require an increase in NWC (spare parts inventory) of $3,000. The truck will have no effect on revenues, but it is expected to save the firm $16,900 per year in before-tax operating costs, mainly labor....
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 truck for $50,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $19,400. Use of the truck will require an increase in NWC (spare parts inventory) of $1,400. The truck will have no effect on revenues, but it is expected to save the firm $17,100 per year in before-tax operating costs, mainly labor....
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 truck for $70,000 , the truck fall into the MACES 3 year class and will be sold after 3 years for $19,900 use of the truck will require a increse in NWC (spare parts inventory) of $1900 , the truck will have no effect on revenues, but is expected to save the firm $23,700 per year in before tax operating...
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 milling machine. The machine's base price is $100,000, and it would cost another $20,000 to modify it for special use by your firm. The machine falls into the MACRS 3-year class (33.33%, 44.45%, 14.81%, and 7.41%). The machine would be sold in five years for $40,000. Use of the machine would require an increase in inventory of $5,000. The machine would have...
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 truck for $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,600. Use of the truck will require an increase in NWC (spare parts inventory) of $2,600. The truck will have no effect on revenues, but it is expected to save the firm $20,200 per year in before-tax operating costs, mainly labor....
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 truck for $70,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $20,200. Use of the truck will require an increase in NWC (spare parts inventory) of $2,200. The truck will have no effect on revenues, but it is expected to save...
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 truck for $340,000. The truck falls into the MACRS 5-year class, and it will be sold after 5 years for $59,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,900. The truck will have no effect on revenues, but it is expected to save the firm $86,000 per year in before-tax operating costs, mainly labor....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT