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 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