Question

Daily Enterprises is purchasing a $10.37 million machine. It will cost $72,284.00 to transport and install the machine. The machine has a depreciable life of five years using the straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.56 million per year along with incremental costs of $1.36 million per year. Daily’s marginal tax rate is 37.00%.

The cost of capital for the firm is 13.00%.

(answer in dollars..so convert millions to dollars)

What is the year 0 cash flow for the project?

What is the yearly cash flow from the project?

The project will run for 5 years. What is the NPV of the project at the current cost of capital?

Answer 1

	Given,
	Cost of machine	$10,370,000
	Installation cost	$72,284
	Life of machine	5 years
	Incremental revenue	$4,560,000
	Incremental cost	$1,360,000
	Tax rate	37%
	Cost of capital	13%
a)	Calculation of Year 0 cashflow
	Cashflow at year0= Cost of machine+Installation cost
		$(10370000+72284)
		$10,442,284
b)	Calculation of yearly cashflows
	Depreciation= Total cost of machine including installment/Life of machine
		10442284/5
		$2,088,456.80
		$
	Incremental revenue	4560000
	Less: Incremental cost	1360000
	Less: Depreciation	2088456.8
	Profit before tax	1111543.2
	Less: Taxes @ 37%	411270.98
	Profit after tax	700272.22
	Add: depreciation	2088456.8
	Annual cashflow	2788729	(rounded off to nearest whole number)
c)	Calculation of NPV
	Year	Cashflow ($)	Discounting factor @ 13%	PV of cashflows ($)
	0	-10442284	1	-10442284.00
	1	2788729	0.884955752	2467901.78
	2	2788729	0.783146683	2183983.88
	3	2788729	0.693050162	1932729.10
	4	2788729	0.613318728	1710379.73
	5	2788729	0.542759936	1513610.38
			NPV	-633679.12
	We know,
	NPV= Present value of future cashflows discounted at the required rate of return
	NPV= ($633679.12)