Question

MSM Company is planning an upgrade to its warehouse. The upgrade involves computerizing many of the material handling activities. The cost of the upgrade is expected to be $2,200,000. The equipment falls into the 5 year IRS depreciation range (use straight line full year every year) but is expected to provide annual cash cost savings and other annual cash benefits totaling $900,000 over each of the next 7 years. MSM is in the 30% tax bracket and has decided to use a 12% hurdle rate, as a first pass, to examine the financial viability of the proposed project. At the end of year seven the firm expects to need to pay $150,000 to have the used equipment disassembled and removed. This amount is fully tax deductible.

a. Prepare a well-organized schedule that concludes with the calculation of the expected NPV from this project.

b. Complete the following chart (one value on each line) making sure that the NPV is the final value presented.

The total after tax present value of the cost of the equipment is                           _________________

The total after tax present value of the depreciation tax savings is                      __________________

The total after tax present value of the Annual cash benefits is                                        ___________________

The total after tax present value of the removal costs is                                                     ___________________

                                    The project’s forecasted Net Present Value (NPV) is                     ___________________

Answer 1