Question

In: Finance

Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...

Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 16,200 dollars. It would be depreciated straight-line to 2,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,900 dollars. The system is expected to reduce costs by 4,500 dollars in year 1 and by 12,200 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 5.07 percent, what is the net present value of the new purification system project?

Question 8

1 point

  • Number Help

Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 16,200 dollars. It would be depreciated straight-line to 2,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 3,400 dollars. Without the new oven, costs are expected to be 10,600 dollars in 1 year and 16,300 in 2 years. With the new oven, costs are expected to be -600 dollars in 1 year and 13,200 in 2 years. If the tax rate is 50 percent and the cost of capital is 11.11 percent, what is the net present value of the new oven project?

  • Submit Assignment
  • Quit & Save

Solutions

Expert Solution

1. Cost of project= 16,200. Given salvage value of 2000 after 2 years, dep per year as per straight line method = (16200-2000)/2= 7100 is th deprecaition for 2 years.

CF0= -16200 (Since investment has been done)

CF1= EBITDA*(1-T) + DEP*T = 4500*(1-0.5) + 7100* (1-0.5)= 5800

CF2= EBITDA*(1-T) + DEP*T+ Money from sale of asset*(1-) = 6100+ 3550+ 2900 (since 2900 are after tax cash flows from sale of asset)

so, CF2= 12,550

Given , discount rate as 5.07%, compute present value as PVCF1= 5800/1.0507= 5520.1294

CF2= 12550/ (1.0507)^2= 11,368.0574

So net presenr value = -16200+5520.1294+11,368.0574= 688.18

2. Cost of project= 16,200. Given salvage value of 2200 after 2 years, dep per year as per straight line method = (16200-2200)/2= 7000 is th depreciation for 2 years.

CF0= -16200 (Since investment has been done)

CF1= EBITDA*(1-T) + DEP*T = 600*(1-0.5) + 7000* (1-0.5)= 3800

CF2= EBITDA*(1-T) + DEP*T+ Money from sale of asset*(1-) = 3100+ 3500+ 3400 (since 3400 are after tax cash flows from sale of asset)

so, CF2= 8450

Given , discount rate as 11.11%, compute present value as PVCF1== 3800/1.11= 3423.423

CF2= 8450/ (1.11)^2= 6858.209

So net presenr value = -16200+3423.423+6858.209 = -5918.36


Related Solutions

Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 19,200 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,000 dollars. The system is expected to reduce costs by 6,600 dollars in year 1 and by 14,700 dollars in year 2. If the tax rate is 50 percent...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today...
Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 18,400 dollars. It would be depreciated straight-line to 1,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 1,900 dollars. The system is expected to reduce costs by 6,700 dollars in year 1 and by 14,800 dollars in year 2. If the tax rate is 50 percent...
#30 Oxygen Optimization is considering buying a new purification system. The new system would be purchased...
#30 Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 17,800 dollars. It would be depreciated straight-line to 1,200 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 1,900 dollars. The system is expected to reduce costs by 6,800 dollars in year 1 and by 14,200 dollars in year 2. If the tax rate is 50...
30. Oxygen Optimization is considering buying a new purification system. The new system would be purchased...
30. Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 20,000 dollars. It would be depreciated straight-line to 2,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,700 dollars. The system is expected to reduce costs by 6,300 dollars in year 1 and by 13,900 dollars in year 2. If the tax rate is 50...
3 A. Oxygen Optimization is considering buying a new purification system. The new system would be...
3 A. Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 16,000 dollars. It would be depreciated straight-line to 1,200 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,100 dollars. The system is expected to reduce costs by 4,700 dollars in year 1 and by 13,000 dollars in year 2. If the tax rate is...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 17,600 dollars. It would be depreciated straight-line to 1,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 1,700 dollars. Without the new oven, costs are expected to be 11,700 dollars in 1 year and 15,200 in 2 years. With the new oven, costs are expected to be -500 dollars in 1 year and 9,300...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 20,800 dollars. It would be depreciated straight-line to 1,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 1,900 dollars. Without the new oven, costs are expected to be 10,400 dollars in 1 year and 17,400 in 2 years. With the new oven, costs are expected to be -3,800 dollars in 1 year and 9,800...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 14,000 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,600 dollars. Without the new oven, costs are expected to be 10,000 dollars in 1 year and 19,900 in 2 years. With the new oven, costs are expected to be 1,500 dollars in 1 year and 17,100...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 19,400 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,200 dollars. Without the new oven, costs are expected to be 12,200 dollars in 1 year and 18,500 in 2 years. With the new oven, costs are expected to be -1,600 dollars in 1 year and 14,400...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for...
Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 17,400 dollars. It would be depreciated straight-line to 2,200 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,800 dollars. Without the new oven, costs are expected to be 13,700 dollars in 1 year and 15,400 in 2 years. With the new oven, costs are expected to be 3,900 dollars in 1 year and 12,300...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT