Question
In: Finance
(ABC) A new computer costs $1,200,000. This cost could be depreciated at 30% per year (Class...
(ABC) A new computer costs $1,200,000. This cost could be depreciated at 30% per year (Class 10). The computer would actually be worth $110,000 in five years. The new computer would save $523,000 per year before taxes and operating costs. Suppose the new computer requires us to increase net working capital by $62,500 when we buy it. If we require a 12% return, what is the NPV of the purchase? Assume a tax rate of 40%. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
Solutions
Expert Solution
NPV = +282,497.52
Working Note:
Step 1:
| Initial Cash flow (Year 0) | |
| Cost of New Computer | (1,200,000.00) |
| Add: Net Working Capital | (62,500.00) |
| Total Outflow | (1,262,500.00) |
Step 2:
In between Flow
| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Saving in Revenue before tax and operating cost | 523,000.00 | 523,000.00 | 523,000.00 | 523,000.00 | 523,000.00 |
| Less: Depreciation | 360,000.00 | 360,000.00 | 360,000.00 | 120,000.00 | - |
| EBIT | 163,000.00 | 163,000.00 | 163,000.00 | 403,000.00 | 523,000.00 |
| Taxes @ 40% | 65,200.00 | 65,200.00 | 65,200.00 | 161,200.00 | 209,200.00 |
| Net Income | 97,800.00 | 97,800.00 | 97,800.00 | 241,800.00 | 313,800.00 |
| Annual Operating Cash Flow(Net Income + Depreciation) | 457,800.00 | 457,800.00 | 457,800.00 | 361,800.00 | 313,800.00 |
Step 3:
| Terminal flow (Year 5) | |
| Salvage value after tax | 66,000.00 |
| Total terminal flow | 66,000.00 |
| Workings | |
| Tax on salvage value | |
| Step 1: Ascertain the profit on sale of asset | |
| Profit = salvage value - book value | |
| Salvage value = | 110,000.00 |
| Book Value at the end of 5th Year | - |
| Profit = salvage value - book value | 110,000.00 |
| Step 2:Calculate tax on the profit @ 40% | 44,000.00 |
| Salvage value after tax | 66,000.00 |
Consolidation of Step 1 to Step 3
| Year | Cash Flow | PVF @ 12% = 1/(1+r)^n | DCF |
| 0 | (1,262,500.00) | 1.000 | (1,262,500.00) |
| 1 | 457,800.00 | 0.893 | 408,750.00 |
| 2 | 457,800.00 | 0.797 | 364,955.36 |
| 3 | 457,800.00 | 0.712 | 325,853.00 |
| 4 | 361,800.00 | 0.636 | 229,930.44 |
| 5 | 379,800.00 | 0.567 | 215,508.72 |
| NPV = PVI - PVO | 282,497.52 | ||
| PVI= | 1,544,997.52 | ||
| PVO= | (1,262,500.00) | ||
| NPV= | 282,497.52 |
| Depreciation at 30% per year (Class 10) | ||||
| Years | Depreciation rate | Asset Value | Depreciation Expense | Closing Book Value |
| 1 | 30% | 1,200,000.00 | 360,000.00 | 840,000.00 |
| 2 | 30% | 1,200,000.00 | 360,000.00 | 480,000.00 |
| 3 | 30% | 1,200,000.00 | 360,000.00 | 120,000.00 |
| 4 | 30% | - | 120,000.00 | - |
| 5 | 30% | - | - | - |
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