Question

Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 2 years. At the end of the second year, the machine will be sold for $100,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%.

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Answer 1

Solution :- Depreciation Per Year = ( $ 228,000 ) / 3 = $76,000

Now The Book Value of Machine after two years = $228,000 - ( $76,000 *2 ) = $76,000

Machine Sold after 2 Years for $100,000

Then Benefit on Sale of machine = ( $100,000 - $76,000 ) = $24,000

Tax on gain on Sale = $24,000 * 34% = $8,160

Now After tax Salvage Value = $100,000 - $8,160 = $91,840

The Net Present Value = $9,554.85

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