(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.)

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BC 1 Time 1 2 3 4 5 2 Cost of computer $ 1,200,000.00 3 Savings per year $(313,800.00) $ (313,800.00) $ (313,800.00) $ (313,800.00) $ (313,800.00) 4 Increase in working capital $ 62,500.00 5 Net cash flow $ 1,262,500.00 $ (313,800.00) $ (313,800.00) $ (313,800.00) $ (313,800.00) $ (313,800.00) 6 NPV = $117,251.10 7 Savings per year before tax and operating costs $ 523,000.00 8 Savings per year after tax and before operating costs $ 313,800.00 (Tax rate = 40%) 9 Depreciation is a non-cash item and thus would not be considered for NPV calculation. 10 No information regarding capital gain/loss on sale of computer after five years, hence it is ignored. 11 Amount spent is considered a positive cash flow and amount saved a negative cash flow

jeff jeffy answered 1 year ago

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