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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 = D*40%) 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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