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SAT-Corp. is considering the purchase of a new piece of machinery that will cost them $1,800,695...
SAT-Corp. is considering the purchase of a new piece of machinery that will cost them $1,800,695 today (in 2010). This piece of machinery, however, will increase the company’s after-tax cash flows by $500,000 in 2011, $750,000 in 2012, $1,000,000 in 2013. If SAT-Corp.’s discount rate (WACC) is 10%, then the NPV of making this purchase is (show steps)
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Expert Solution
| Solution: | |||
| NPV of making this purchase is $25,000 | |||
| Working Notes: | |||
| Notes: | NPV for the machine is calculated by discounting cash flows due to the purchase of machine during the life of machine and discount rate is the required rate of return of SAT-corp the WACC . Increase the company’s after-tax cash flows is the cash flows due to the machine and same is used for the computation of NPV. | ||
| Year | Cash Flow | PVF @ 10% | Present value |
| 0 | -1,800,695 | 1 | -1,800,695.00 |
| 1 | 500,000 | 0.90909091 | 454,545.45 |
| 2 | 750,000 | 0.82644628 | 619,834.71 |
| 3 | 1,000,000 | 0.75131480 | 751,314.80 |
| NPV | 24,999.97 | ||
| 25,000 | |||
| Notes: PVF is calculated @ 10% = 1/(1+0.10)^n where n is the period for which PVF is calculated. | |||
| Please feel free to ask if anything about above solution in comment section of the question. | |||
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