Question

The risk management system for loss control that is being evaluated is for a chemistry lab safety shower call back alarm. The equipment and its installation are estimated to cost $400,000. The useful life is 14 years without any salvage value at the end of the useful life. Insurance premium reductions of $50,000 per year have been negotiated. Loss reduction is expected to amount to a savings of at least $75,000 per year. The alarm connection has an annual fee of $1500 associated with the system. Maintenance of the shower alarm call back is expected to be $1,000 during the first 7 years of the systems useful life and $1500 for the remaining 7 years. The chemical research and development company are in the 35% corporate tax rate. The cost of capital (or appropriate discount rate) for this project is 10%. What is the NPV of the project? Would you accept or reject this project. Justify your answer.

Answer 1

Initial cost		=	$400,000
Depreciation		=	Initial cost/life
		=	$400,000/14
		=	$    28,571.43
Calculation of cashflow
	(a)	(b)	(c.)	(d)	(.e)=a-b-c-d	(f)=e*35%	(g)=e-f	(h)=g+d	(i)	(j)=h*i
Years	Saving	Insurance premium	Maintenance	Depreciation	Profit	Tax	Net profit	Cashflow	PVF@10%	PV
1	75000	50000	1000	28571.43	-4571.43	-1600.0005	-2971.43	25600	0.909091	23272.73
2	75000	50000	1000	28571.43	-4571.43	-1600.0005	-2971.43	25600	0.826446	21157.03
3	75000	50000	1000	28571.43	-4571.43	-1600.0005	-2971.43	25600	0.751315	19233.66
4	75000	50000	1000	28571.43	-4571.43	-1600.0005	-2971.43	25600	0.683013	17485.14
5	75000	50000	1000	28571.43	-4571.43	-1600.0005	-2971.43	25600	0.620921	15895.59
6	75000	50000	1000	28571.43	-4571.43	-1600.0005	-2971.43	25600	0.564474	14450.53
7	75000	50000	1000	28571.43	-4571.43	-1600.0005	-2971.43	25600	0.513158	13136.85
8	75000	50000	1500	28571.43	-5071.43	-1775.0005	-3296.43	25275	0.466507	11790.97
9	75000	50000	1500	28571.43	-5071.43	-1775.0005	-3296.43	25275	0.424098	10719.07
10	75000	50000	1500	28571.43	-5071.43	-1775.0005	-3296.43	25275	0.385543	9744.607
11	75000	50000	1500	28571.43	-5071.43	-1775.0005	-3296.43	25275	0.350494	8858.733
12	75000	50000	1500	28571.43	-5071.43	-1775.0005	-3296.43	25275	0.318631	8053.394
13	75000	50000	1500	28571.43	-5071.43	-1775.0005	-3296.43	25275	0.289664	7321.267
14	75000	50000	1500	28571.43	-5071.43	-1775.0005	-3296.43	25275	0.263331	6655.698
									Total	187775.3
		NPV	=	Sum of PV of inflow-Initial outflow
			=	$187775.3-$400,000
			=	$                          (212,224.70)
	We will not accept the project since NPV is negative.It will decrease the value of the firm
	There may be little differnce due to decimal places
	Please upvote the answer
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