Question

A&Y Inc. considers a 7-year project that requires $500,000 of investment in new machinery and $40,000 in NWC (that will stay constant for the entire life of the project). At the end of the project the equipment will be sold for a salvage value of $70,000. The cost of capital is 10%, the equipment belongs to a CCA class with d=40%, and the corporate tax rate is 30%

Problem 20: Prof Reynolds was able to use his industry connections to get a 3% discount on the equipment (i.e., it can be purchased for $485,000 instead of $500,000). By how much will this increase the project’s NPV?

Answer 1

Tax rate		30%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Total
Cost		$           500,000	$          300,000	$           180,000	$               108,000	$             64,800	$             38,880	$        23,328
Dep Rate		40.00%	40.00%	40.00%	40.00%	40.00%	40.00%	40.00%
Depreciation	Cost * Dep rate	$           200,000	$          120,000	$             72,000	$                 43,200	$             25,920	$             15,552	$           9,331	$ 486,003
Closing WDV		$           300,000	$          180,000	$           108,000	$                 64,800	$             38,880	$             23,328	$        13,997
Calculation of annual depreciation after discount
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Total
Cost		$           485,000	$          291,000	$           174,600	$               104,760	$             62,856	$             37,714	$        22,628
Dep Rate		40.00%	40.00%	40.00%	40.00%	40.00%	40.00%	40.00%
Depreciation	Cost * Dep rate	$           194,000	$          116,400	$             69,840	$                 41,904	$             25,142	$             15,085	$           9,051	$ 471,423
Closing WDV		$           291,000	$          174,600	$           104,760	$                 62,856	$             37,714	$             22,628	$        13,577
Differential depreciation		$                6,000	$               3,600	$                2,160	$                   1,296	$                  778	$                   467	$              280
Tax benefit		$                1,800	$               1,080	$                   648	$                      389	$                  233	$                   140	$                84
Calculation of after-tax salvage value			Without discount	With discount
Cost of machine			$          500,000	$           485,000
Depreciation			$          486,003	$           471,423
WDV	Cost less accumulated depreciation	$             13,997	$             13,577
Sale price			$             70,000	$             70,000
Profit/(Loss)	Sale price less WDV		$             56,003	$             56,423
Tax	Profit/(Loss)*tax rate	$             16,801	$             16,927
Sale price after-tax	Sale price less tax		$             53,199	$             53,073
Differential salvage value			$                  126
Calculation of differential NPV
				(1)		10.00%
Year		Capital		Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$             15,000			$                 15,000	1.0000	$        15,000.00
1				$        (1,800.00)	$                  (1,800)	0.9091	$        (1,636.36)
2				$        (1,080.00)	$                  (1,080)	0.8264	$            (892.56)
3				$            (648.00)	$                     (648)	0.7513	$  &nb jeff jeffy Next > < Previous Related Solutions XYZ inc. considers an investment project that requires $500,000 in new equipment and $40,000 in extra NWC at the beginning of the project  XYZ inc. considers an investment project that requires $500,000 in new equipment and $40,000 in extra NWC at the beginning of the project (that will be recovered when the project ends). The projects will lead to an increase in operating pre-tax net revenue of $150,000 per year and will last for 5 years. At the end of the project (beginning of year t=6), the equipment can be sold for the salvage value of $120,000. The equipment belongs to the CCA... Down Under Boomerang, Inc., is considering a new 7-year project that requires an initial investment in... Down Under Boomerang, Inc., is considering a new 7-year project that requires an initial investment in a fixed asset of $2.376 million. The fixed asset will be depreciated straight-line to zero over its 7-year life. After Year 0, the project is expected to generate $2,112,000 in annual sales per year, with operating costs of $844,800 per year. The tax rate is 34 percent and the appropriate discount rate is 9 percent. The project requires an increase in net working capital... Acme is considering a new project that requires an investment of $100 million in machinery. This... Acme is considering a new project that requires an investment of $100 million in machinery. This is expected to produce earnings before interest and taxes of $16 million per year for 4 years. The machinery will be fully depreciated to a zero-book value over 4 years using straight-line depreciation. Working capital costs are negligible. The tax rate is 25%. The unlevered cost of capital is 13%. They have a target debt ratio (debt/value) for the firm of 45%. Joker plans... You are investing in a project that requires an initial investment of $500,000. The project will... You are investing in a project that requires an initial investment of $500,000. The project will last for 10 years with the following additional cash flows (CF) at the end of each year: If the discount rate is 10%, calculate the payback periods in Excel for both the methods below; Years 1 2 3 4 5 6 7 8 9 10 CF -500,000 80,000 100,000 100,000 120,000 140,000 150,000 150,000 150,000 150,000 a) Payback Method [10] b) Discounted Payback Method... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.7 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $465,000. The project is expected to generate $3.3 million in annual sales, with annual expenses of $980,000. The project will require an initial investment of $515,000 in NWC that will be returned at the end of... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.1 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $425,000. The project is expected to generate $2.9 million in annual sales, with annual expenses of $940,000. The project will require an initial investment of $475,000 in NWC that will be returned at the end of... Cochran Inc is considering a new three-year expansion project that requires an intial fixed investment of... Cochran Inc is considering a new three-year expansion project that requires an intial fixed investment of 1,500,000. The equipment will be depreciated using the 5 years MACRS and will be sold at the end of the project for $170,000. The project will generate $900,000 in annual sales and generate costs of $160,000. The project will require an additional investment of $75,000 in Net Working Capital. The tax rate for the project is 20 percent and the required return is 16... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.5 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $445,000. The project is expected to generate $3.1 million in annual sales, with annual expenses of $960,000. The project will require an initial investment of $495,000 in NWC that will be returned at the end of... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.7 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $385,000. The project is expected to generate $2.5 million in annual sales, with annual expenses of $900,000. The project will require an initial investment of $435,000 in NWC that will be returned at the end of... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of... Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.65 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $460,000. The project is expected to generate $3.25 million in annual sales, with annual expenses of $975,000. The project will require an initial investment of $510,000 in NWC that will be returned at the end of... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions Explain at least three reasons why there are so many divisions / denominations in the Christian... COSC 1436 Programming Assignment : Skill Practice Assignment 3 Your skill practice assignment this week will... Waste elimination and process improvement can be applied to virtually any process. Identify a process at... Do you think the FASB should continue to require the Statement of Cash Flows or are... Here is your chance to analyze an actual co-worker conflict situation and make suggestions on how... McKinsey Machines Ltd manufactures a single product A.   It has two cost centers namely molding department... Threads: Assume a multithreaded application using user level threads mapped to a single kernel level thread... ADVERTISEMENT About @ 2020 WizEdu