Question

Cookies R Us Incorporated is evaluating a new cookie cutting machine that will cost $500,000. The machine can be depreciated on a straight-line basis to zero over 10 years. It will provide the company with annual before-tax savings of $135,000. The marginal corporate tax rate is 40% and the required rate of return is 15%. What is the net present value of this cost-cutting asset?

Multiple Choice

• $128,611.12

• $157,458.69

• -$193,855.11

• $6,895.63

• $277,909.14

Answer 1

$6,895.63

Step-1:Calculation of annual cash flows
Annual before tax saving (a)	1,35,000.00
Depreciation (b)	50,000.00
Profit before tax(c=a-b)	85,000.00
Tax Expense (d=c*40%)	34,000.00
Net Income (e=c-d)	51,000.00
Depreciation (b)	50,000.00
Annual cash flow (e+b)	1,01,000.00
Working:
Annual depreciation	=	(Cost - Salvage Value)/Useful Life
	=	(500000-0)/10
	=	$        50,000
Step-2:Calculation of net present value
Present Value of annual cash flow	$ 5,06,895.63
Cost of Machine	$ 5,00,000.00
Net Present Value	$       6,895.63
Working:
Present Value of annual cash flow	=-pv(rate,nper,pmt,fv)		Where,
	= $ 5,06,895.63			rate	=	15%
				nper	=	10
				pmt	=	1,01,000.00
				fv	=	0