Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,600 and sell its old washer for $2,300. The new washer will last for 6 years and save $1,800 a year in expenses. The opportunity cost of capital is 19%, and the firm’s tax rate is 21%. a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.) b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a)Annual operating cash flow in year 0, Annual operating flow in years 1 to 6

b) NPV

c)NPV

Answer 1

Tax rate	21.00%
	Old equipment
WDV	$                        -
Sale price	$                  2,300
Gain/(Loss), (2300-0)	$                  2,300
Tax benefit	$                     483	=2300*21%
Sale price after tax	$                  1,817	=2300-483
Cost of new equipment	$                  6,600
Less sale proceed of old equipment	$                 (1,817)
Net investment	$                  4,783
Depreciation on new equipment
Year	Cost	Dep rate	Depreciation	Depreciation	Tax shield @ 21%	Bonus depreciation	Bonus depreciation	Tax shield @ 21%
1	$                  6,600	16.67%	=6600*16.67%	$           1,100	$         231.00	100%	$       6,600	$1,386.00
2	$                  6,600	16.67%	=6600*16.67%	$           1,100	$         231.00	0%		$           -
3	$                  6,600	16.67%	=6600*16.67%	$           1,100	$         231.00	0%		$           -
4	$                  6,600	16.67%	=6600*16.67%	$           1,100	$         231.00	0%		$           -
5	$                  6,600	16.67%	=6600*16.67%	$           1,100	$         231.00	0%		$           -
6	$                  6,600	16.67%	=6600*16.67%	$           1,100	$         231.00	0%		$           -
After tax value of operating profits
Year	Annual saving		Cost saving	Dep rate	After tax saving
1	$                  1,800		$                        1,800	=1800*(1-21%)	$           1,422
2	$                  1,800		$                        1,800	=1800*(1-21%)	$           1,422
3	$                  1,800		$                        1,800	=1800*(1-21%)	$           1,422
4	$                  1,800		$                        1,800	=1800*(1-21%)	$           1,422
5	$                  1,800		$                        1,800	=1800*(1-21%)	$           1,422
6	$                  1,800		$                        1,800	=1800*(1-21%)	$           1,422
				Total	$           8,532
Calculation of NPV						19%
Year	Capital commitment		Annual benefit	Dep tax shield	Annual free cashflow	PV factor, 1/(1+r)^time	Total * PV factor
0	$            (4,783.00)		$                              -	$                 -	$          (4,783)	1.00000	$(4,783.00)
1			$                        1,422	$              231	$           1,653	0.84034	$ 1,389.08
2			$                        1,422	$              231	$           1,653	0.70616	$ 1,167.29
3			$                        1,422	$              231	$           1,653	0.59342	$     980.92
4			$                        1,422	$              231	$           1,653	0.49867	$     824.30
5			$                        1,422	$              231	$           1,653	0.41905	$     692.69
6	$                        -		$                        1,422	$              231	$           1,653	0.35214	$     582.09
						NPV	$     853.36
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