Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $7,800 and sell its old washer for $1,600. The new washer will last for 6 years and save $2,300 a year in expenses. The opportunity cost of capital is 17%, and the firm’s tax rate is 40%.

a. If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 0 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amount should be indicated by a minus sign.)

Annual operating cash flow in year 0= -6840

Annual operating cash in flow year 1-6 = 1900

b. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV = -20.55

c. What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

I am having trouble with this one NPV=

Answer 1

Time line		0	1	2	3	4	5	6
Proceeds from sale of existing asset	=selling price* ( 1 -tax rate)	960
Tax shield on existing asset book value	=Book value * tax rate	0
Cost of new machine		-7800
=Initial Investment outlay		-6840
5 years MACR rate			20.00%	32.00%	19.20%	11.52%	11.52%	5.76%
Savings			2300	2300	2300	2300	2300	2300
-Depreciation	=Cost of machine*MACR%		-1560	-2496	-1497.6	-898.56	-898.56	-449.28
=Pretax cash flows			740	-196	802.4	1401.44	1401.44	1850.72
-taxes	=(Pretax cash flows)*(1-tax)		444	-117.6	481.44	840.864	840.864	1110.432
+Depreciation			1560	2496	1497.6	898.56	898.56	449.28
=after tax operating cash flow			2004	2378.4	1979.04	1739.424	1739.424	1559.712
+Tax shield on salvage book value	=Salvage value * tax rate							3.638E-13
=Terminal year after tax cash flows								3.638E-13
Total Cash flow for the period		-6840	2004	2378.4	1979.04	1739.424	1739.424	1559.712
Discount factor=	(1+discount rate)^corresponding period	1	1.17	1.3689	1.601613	1.8738872	2.192448	2.5651642
Discounted CF=	Cashflow/discount factor	-6840	1712.821	1737.453	1235.6543	928.2437	793.37069	608.03593
NPV=	Sum of discounted CF=	175.58