Question

We’re contemplating a new automatic surveillance system to replace our current contract security system. It will cost $400,000 to get the new system. The cost will be depreciated straight-line to zero over the system’s five-yearexpected life. The system is expected to be worth $50,000 at the end of five years. We think the new system will save us $105,000, before taxes, per year in contract security costs.

The tax rate is 34 percent. The required return is 12 percent. Create a projected cash flow model. What is the Capital Sprending for year 5?

Answer 1

	Statement Showing Computation Of PVCI					In $
		1	2	3	4	5
	Savings	105000.00	105000.00	105000.00	105000.00	105000.00
Less	Depreciation	80000.00	80000.00	80000.00	80000.00	80000.00
	EBT	25000.00	25000.00	25000.00	25000.00	25000.00
Less	Taxes(34%)	8500.00	8500.00	8500.00	8500.00	8500.00
	EAT	16500.00	16500.00	16500.00	16500.00	16500.00
Add	Depreciation	80000.00	80000.00	80000.00	80000.00	80000.00
	Cash Flow After taxes	96500.00	96500.00	96500.00	96500.00	96500.00
	Discount Factor(12.00%)	0.893	0.797	0.712	0.636	0.567
	Discounted Cash Flows	86160.71	76929.21	68686.79	61327.49	54756.69
	PVCI	347860.90
	NPV =PVCI-PVCO	-33414.01

	Statement Showing PVCO				In $
	Year	0	1	2	3	4	5
	Cost of Equipment	400000.00	0.00	0.00	0.00	0.00	0.00
	Salvage Value	0.00	0.00	0.00	0.00	0.00	-33000.00
	Net Cash Flows	400000.00	0.00	0.00	0.00	0.00	-33000.00
	Discount factor(12%)	1.000	0.893	0.797	0.712	0.636	0.567
	Discounted Cash Flows	400000.00	0.00	0.00	0.00	0.00	-18725.09
	PVCO	381274.91
				In $
		Salvage Value Of Equipmet
		Sale Price	50000.00
		WDV at End of year 5	0.00
		Profit	50000.00
		Tax @34%	17000.00
		Net Inflows	33000.00

Depreciation as Per SLM = Original Cost - Salvage Value/ Useful Life
Depreciation	400000-0/5
$	80000