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Crono Clocks is looking at a Clock Machine with an installed cost of $900,000. This cost...
Crono Clocks is looking at a Clock Machine with an installed cost of $900,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the Clock Machine can be scrapped for $111,000. The clock system will save the firm $299,000 per year in pretax operating costs, and the machine requires an initial investment in net working capital of $67,000.
If the tax rate is 34 percent and the discount rate is 8 percent, what is the NPV of this project? (Round answer to two decimal places)
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Expert Solution
| Ref | Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| a | Operating cash flow | $ 299,000.00 | $ 299,000.00 | $299,000.00 | $299,000.00 | $410,000.00 | |
| b | Depreciation | $ 180,000.00 | $ 180,000.00 | $180,000.00 | $180,000.00 | $180,000.00 | |
| c=a-b | Profit before tax | $ 119,000.00 | $ 119,000.00 | $119,000.00 | $119,000.00 | $230,000.00 | |
| Less: taxes | $ 40,460.00 | $ 40,460.00 | $ 40,460.00 | $ 40,460.00 | $ 78,200.00 | ||
| Profit after tax | $ 78,540.00 | $ 78,540.00 | $ 78,540.00 | $ 78,540.00 | $151,800.00 | ||
| Add: depreciation | $ 180,000.00 | $ 180,000.00 | $180,000.00 | $180,000.00 | $180,000.00 | ||
| Cash flow after tax | $ 258,540.00 | $ 258,540.00 | $258,540.00 | $258,540.00 | $331,800.00 | ||
| d | Present value factor@ 8.0% | 0.925925926 | 0.85733882 | 0.793832241 | 0.735029853 | 0.680583197 | |
| e=c*d | Present value of annual cashflows | $ 239,388.89 | $ 221,656.38 | $205,237.39 | $190,034.62 | $225,817.50 | |
| Total present value of annual cash inflows | $ 1,082,134.78 | ||||||
| Less: investment | $ 900,000.00 | ||||||
| NPV | $ 182,134.78 |
NPV is $182,134.78
Please rate.
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