Question

Market Top investors, Inc., is considering the purchase of a 345000 computer with an economic life of four years. The computer will be fully depreciated over four years using the straight line method, at which time it will be worth 92,0000. The machine will also immediately lower the firm’s required net working capital by 81000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 21 percent. The appropriate discount rate is 10 percent. Calculate the NPV of this project

Answer 1

Calculation of NPV of project
Year	0	1	2	3	4
Purchase of computer	-$345,000
Release of net working capital	$81,000
Investment in net working capital					-$81,000
Depreciation tax shield		$18,113	$18,113	$18,113	$18,113
Sale of computer					$92,000
Tax on Gain on sale of computer					-$19,320
Net Cash flows	-$264,000	$18,113	$18,113	$18,113	$9,793
x Discount Factor @ 10%	1	0.9090909	0.8264463	0.7513148	0.68301346
Present Values	-$264,000	$16,466	$14,969	$13,609	$6,689
Net Present Value	-$212,267
NPV of project =	-$212,267
Working
Depreciation per year using straight line method = Cost / useful life = $345000 / 4 years = $86,250
Depreciation tax shield = Depreciation per year x Tax rate = $86,250 x 21% = $18,113