Question

(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.)

Answer 1

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%	-	-	-