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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

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