Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer for a 4-year project. The old machine was bought 3 years ago for $10,000 and will be depreciated to 1,000 using straight-line method with an assume life of 5 years. Actually, the old machine can be sold for $8,000 now. The new washer can be installed today for $12,000. The new machine will have a 3-year life and will be depreciated to $3,000 using straight-line depreciation. At the end of the project life, the after-tax cash flow of selling the machine is $3,000. With the new washer, the firm is expected to have revenue of $10,000, $12,000, and $13,000 for each of the next three years. The COGS is 40% of the revenue, and the SG&A is $3,000 each year. Suppose Bottoms Up Diaper Service’s inventories are 15% of total expense. If the opportunity cost of capital is 9%, and corporate tax rate is 35%, what is the project’s NPV?

Answer 1

Tax rate=	35%		Opportunity cost of capital =			9%
Year	0	1	2	3
Purchase new washer	12,000.00
Sell the old washer	8,000.00
Net investment	(4,000.00)
Revenue		10,000.00	12,000.00	13,000.00
expenses		4,000.00	4,800.00	5,200.00
SG&A		3,000.00	3,000.00	3,000.00
depreciation		3,000.00	3,000.00	3,000.00
total expenses		10,000.00	10,800.00	11,200.00
EBIT		-	1,200.00	1,800.00
tax		0	420.00	630.00
Income			780.00	1,170.00
income from selling				3,000.00
net income			780.00	4,170.00
depreciation+		3,000.00	3,000.00	3,000.00
Cash flow		3,000.00	3,780.00	7,170.00
1/(1+R)n		0.9174312	0.84167999	0.7721835
		2,752.29	3,181.55	5,536.56
NPV	7,470.40