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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.)
Solutions
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 | ||||||
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