Question

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3.09 million and will last for six years. Variable costs are 32% of sales, and fixed costs are $1,987,522 per year. Machine B costs $4.93 million and will last for nine years. Variable costs for this machine are 21% of sales and fixed costs are $1,350,735 per year. The sales for each machine will be $6.4 million per year. The required return is 12 %, and the tax rate is 38%. Both machines will be depreciated to zero on a straight-line basis. Each project will require an increase in inventory of $373,613, an increase in accounts receivable of $723,406, and an increase in accounts payable of $365,677. Assume a salvage value of $713,222 for both machines.

Calculate the NPV for machine A. (Round answer to 2 decimal places. Do not round intermediate calculations)

Answer 1

Solution:

NPV for MAchine A is calcualted as below

Paraticulrs/Years	0	1	2	3	4	5	6
1) Machine cost	(30,90,000)	0	0	0	0	0	0
2) Sales		64,00,000	64,00,000	64,00,000	64,00,000	64,00,000	64,00,000
3)Less:Variable cost -@ 32%		20,48,000	20,48,000	20,48,000	20,48,000	20,48,000	20,48,000
4)Less: FIxed Cost		19,87,522	19,87,522	19,87,522	19,87,522	19,87,522	19,87,522
5) Less: Depreciation (6400000/6)		5,15,000	5,15,000	5,15,000	5,15,000	5,15,000	5,15,000
6) Profit before tax (2-3-4-5)		18,49,478	18,49,478	18,49,478	18,49,478	18,49,478	18,49,478
7)Less: Tax @38%		7,02,801.64	7,02,801.64	7,02,801.64	7,02,801.64	7,02,801.64	7,02,801.64
8)Profit after tax		11,46,676.36	11,46,676.36	11,46,676.36	11,46,676.36	11,46,676.36	11,46,676.36
9) Increase in Inventory		(3,73,613)					3,73,613
10)Increase in Accounts Receivable		(7,23,406)					7,23,406
11)Increase in Accounts Payable		3,65,677					(3,65,677)
12) Add: Depreciation		5,15,000	5,15,000	5,15,000	5,15,000	5,15,000	5,15,000
13)Add: Salvage Value (W/N 1)							4,42,197.64
14) Net Cash flow (1+8-9-10+11+12+13)	(30,90,000)	9,30,334.36	16,61,676.36	16,61,676.36	16,61,676.36	16,61,676.36	28,35,216
Discounting factor @12%	1	0.8928	0.7972	0.7117	0.6355	0.5674	0.5066
Present value of cash flows	(30,90,000)	8,30,602.51	13,24,688.39	11,82,615.06	10,55,995.32	9,42,835.16	14,36,320.42
NPV =	36,83,056.86

W/N 1) Calculation of cashflow from sale of machine at end of 6Year

Salvage Value = 713,222

Book Value of Machine= 0

Therefore profit from sale = 713,222

Tax on profit @ 38% = 271,024.36

so Net Cash inflow from sale of machine = 4,42,197.64

Note : It has been assumed that the change in working capital in terms of Inventories, Account receivable & Payable will be recovered at the end of the life of machine as a recovery of working capital.