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.)
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Expert Solution
| NPV of Purchase | |||
| New computer cost | = | $1,200,000 | |
| Dep Rate | = | 0.3 | |
| Scrap Value | = | $110,000 | |
| Working Capital | = | $62,500 | |
| Life | |||
| Depreciation per year | = | $1,200,000*0.3 | |
| $3,60,000 | |||
| Depraciable value | = | $1,200,000-$110,000 | |
| $10,90,000 | |||
| Life | = | Depreciable value / Depraciation per year | |
| = | 3.03 | ||
| Life(Approx) | = | 3 years | |
| A | Outflows | ||
| New computer cost | = | $12,00,000 | |
| Working Capital | = | $62,500 | |
| = | $12,62,500 | ||
| B | Savings | ||
| 1 | Depreciation | = | $1,200,000*0.3 |
| = | $3,60,000 | ||
| Tax Rate | = | 0.4 | |
| Tax savings on Depreciation | = | $1,44,000 | |
| 2 | Savings before taxes and operating costs due to new computer | = | $5,23,000 |
| Less : Taxes @0.4 | = | $2,09,200 | |
| Net savings | = | $3,13,800 | |
| Total savings per year (1+2) | = | $4,57,800 | |
| C | Terminal Cash inflows | ||
| Scrap value of Computer | = | $1,10,000 | |
| Working Capital | = | $62,500 | |
| = | $1,72,500 | ||
| Present value of yealy cash Inflows | = | PVAF (12%,3 years)*$457,800 | |
| = | $457,800*2.402 | ||
| = | $10,99,635.60 | ||
| Present value of Terminal cash flows | = | PV(12%,3rd Year)*$172,500 | |
| = | $172,500*0.7118 | ||
| = | $1,22,785.50 | ||
| Present value of cash inflows | = | $12,22,421.10 | |
| NPV | = | Present value of cash inflows - Present value of cash outflows | |
| = | $1,222,421-$1,262,500 | ||
| NPV | = | -$40,079.00 | |
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