A new booster machine will cost $480,000. The anticipated increase in revenue will be $140,000/year for...

A new booster machine will cost $480,000. The anticipated increase in revenue will be $140,000/year for 5-years. Annual expenses will be $30,000/year for 5-years. The depreciable life is estimated to be 5-years and the salvage value will equal $35,000. Additional inventory necessary to run the machine will be $26,000. Initial training expenses are $20,000. Tax rate equals 40%.

 Find the NPV@10%.

 Find the IRR.

 Find the discounted payback and convert this into a percentage.

Solutions

Expert Solution

Particulars	1	2	3	4	5	Total
Revenue (A)	140000	140000	140000	140000	140000
Expenses (B)	30000	30000	30000	30000	30000
Depreciation ©	89000	89000	89000	89000	89000
Profit Before Tax (D = A - B- C)	21000	21000	21000	21000	21000
*Tax ( E = D40%)**	8400	8400	8400	8400	8400
Cash flow ( F = D + C -E)	101600	101600	101600	101600	101600
Discouting Factor ( G=1/ ( 1 + r)^n	0.909091	0.826446	0.751315	0.683013	0.620921
*Present value ( F G)**	92363.64	83966.94	76333.58	69394.17	63085.61	385143.9
*Present value of salvage value + Inventory ( 26000 + 35000 ) 1/1.10^5**	37876.2
Initial Investment						-526000
Net Present Value						-102980

Depreciation =( Historical cost - salvage value ) / useful life = ( 480000 - 35000 ) / 5 = 89000

Initial Investment = 480000 + 20000 + 26000 = 526000

Net Present value = - 102980

IRR is the rate of return which makes the present value of cash outflows equal to the present value of cash inflows

Let us use Financial calculator to find out the IRR

CF0	CF1	FR1	CF2	FR2	CF3	FR3	CF4	FR4	CF5	FR5	IRR < CPT
-526000	101600	1	101600	1	101600	1	101600	1	162600	1	2.50%

IRR = 2.5%

Years	Cash flows	Discounting Factor	Present value	Cummulative Present value
1	101600	0.909090909	92363.63636	92363.63636
2	101600	0.826446281	83966.94215	176330.5785
3	101600	0.751314801	76333.58377	252664.1623
4	101600	0.683013455	69394.16707	322058.3293
5	162600	0.620921323	100961.8071	423020.1365

Discounted payback period = more than 5 as there is -ve NPV.

jeff jeffy answered 1 year ago

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