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Heron Corporation is planning to add manufacturing capacity by installing new high-tech machines. The machines would...

Heron Corporation is planning to add manufacturing capacity by installing new high-tech machines. The machines would increase revenues by $180,000 per year and increase costs by $50,000 per year. The new machines cost $560,000 and would be depreciated over 5 years using simplified straight line. Investment in net working capital of $30,000 would be required at the time of installation. The firm is planning to keep the machines for 7 years and then sell them for $80,000. The firm has a required rate of return on investment projects of 13% and a tax rate of 21%. What is the net present value of this project?

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Expert Solution

Cash Flows from Year 1 to Year 5
Incremental Revenue 180000
Less: Incremental Costs 50000
Less: Depreciation (560000-80000)/5 96000
Income before taxes 34000
Less: Taxes (54000*21%) 7140
Net income 26860
Add: Depreciation 96000
Incremental Cash flows 122860
Cash Flows from Year 6 & Year 7
Incremental Revenue 180000
Less: Incremental Costs 50000
Less: Depreciation 0
Income before taxes 130000
Less: Taxes (150000*21%) 27300
Net income 102700
Add: Depreciation 0
Incremental Cash flows 102700
Net present value of the project
Year Cash flows PV factor @13% Discounted cash flows
0 Initial investment -560000 1.000000 -560000
0 Net working capital -30000 1.000000 -30000
1 Net Cash flows 122860 0.884956 108726
2 Net Cash flows 122860 0.783147 96217
3 Net Cash flows 122860 0.693050 85148
4 Net Cash flows 122860 0.613319 75352
5 Net Cash flows 122860 0.542760 66683
6 Net Cash flows 102700 0.480319 49329
7 Net Cash flows 102700 0.425061 43654
7 Salvage value 80000 0.425061 34005
Net present value -30885

jeff jeffy answered 2 years ago
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