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A new electronic process monitor costs $870,000. This cost could be depreciated at 30% per year,...

A new electronic process monitor costs $870,000. This cost could be depreciated at 30% per year, (class 10). the monitor would actually be worth $95,000 in five years. The new monitor would save $465,000 per year before taxes and operating costs. Suppose the new monitor requires us to increase networking capital by $39,500 when we buy it. if we require a 12% return, what is the NPV of the purchase? assume a tax rate of 35%. (Dot not round intermediate calculations, round the final answer to 2 decimals.)

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Expert Solution

Tax rate 35%
Calculation of annual depreciation
Depreciation Year-1 Year-2 Year-3 Year-4 Year-5 Total
Cost $           870,000 $      609,000 $          426,300 $               298,410 $      208,887
Dep Rate 30.00% 30.00% 30.00% 30.00% 30.00%
Depreciation Cost * Dep rate $           261,000 $      182,700 $          127,890 $                 89,523 $        62,666 $       723,779
Closing WDV $           609,000 $      426,300 $          298,410 $               208,887 $      146,221
Calculation of after-tax salvage value
Cost of machine $      870,000
Depreciation $      723,779
WDV Cost less accumulated depreciation $      146,221
Sale price $        95,000
Profit/(Loss) Sale price less WDV $       (51,221)
Tax Profit/(Loss)*tax rate $       (17,927)
Sale price after-tax Sale price less tax $      112,927
Calculation of annual operating cash flow
Year-1 Year-2 Year-3 Year-4 Year-5
Cash saving $           465,000 $      465,000 $          465,000 $               465,000 $      465,000
Less: Depreciation $           261,000 $      182,700 $          127,890 $                 89,523 $        62,666
Profit before tax (PBT) $           204,000 $      282,300 $          337,110 $               375,477 $      402,334
Tax@35% PBT*Tax rate $             71,400 $        98,805 $          117,989 $               131,417 $      140,817
Profit After Tax (PAT) PBT - Tax $           132,600 $      183,495 $          219,122 $               244,060 $      261,517
Add Depreciation PAT + Dep $           261,000 $      182,700 $          127,890 $                 89,523 $        62,666
Cash Profit after-tax $           393,600 $      366,195 $          347,012 $               333,583 $      324,183
Calculation of NPV
12.00%
Year Capital Working capital Operating cash Annual Cash flow PV factor, 1/(1+r)^time Present values
0 $     (870,000.00) $ (39,500.00) $        (909,500.00)            1.0000 $(909,500.00)
1 $     393,600.00 $          393,600.00            0.8929 $ 351,428.57
2 $     366,195.00 $          366,195.00            0.7972 $ 291,928.41
3 $     347,011.50 $          347,011.50            0.7118 $ 246,995.93
4 $     333,583.05 $          333,583.05            0.6355 $ 211,998.06
5 $      112,927.32 $   39,500.00 $     324,183.14 $          476,610.45            0.5674 $ 270,441.57
Net Present Value $ 463,292.54

jeff jeffy answered 1 year ago
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