Question

Kaufman machine is considering a 3-year project to improve production efficiency. The machine will cost $650,000 and will lower annual pretax costs by $380,000. The machine falls in the MACRS 3-year class and it will have a salvage value at the end of the project of $160,000. The project also requires an initial investment in NWC of $50,000 which will be recovered at the end. Their tax rate is 20 percent and their discount rate is 15 percent.

YEAR. 3- YEAR MACRS%

1 33.33

2 44.45

3 14.81

4 7.41

what is the NPV?

Answer 1

MARC depreciation
Year	1	2	3
Rate	33.33%	44.45%	14.81%
Depreciation	216645	288925	96265
Post tax salvage value
Book value =	48165
Sales price	160000
Gain on sale	111835
Tax on gain	22367
Post tax salvage value	137633
Computation of NPV
year	0	1	2	3
Initial investment	(650,000)
Working capital	(50,000)			50,000
Operating cash flow
Saving in cost		380,000	380,000	380,000
depreciation		216,645.00	288,925.00	96,265.00
Profit before tax		163,355.00	91,075.00	283,735.00
Tax @ 20%		32,671.00	18,215.00	56,747.00
Net income		130,684.00	72,860.00	226,988.00
Operating cash flow(income+dep)	347,329.00	361,785.00	323,253.00
Post tax salvage value				137633
Net cash flow	(700,000.00)	347,329.00	361,785.00	510,886.00
PVIF @ 15%	1	0.869565217	0.756143667	0.657516232
Present value	(700,000.00)	302,025.22	273,561.44	335,915.84	211,502.49
NPV =	211,502.49