Question

Daily Enterprises is purchasing a $10.47 million machine. It will cost $64,199.00 to transport and install the machine. The machine has a depreciable life of five years using the straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.34 million per year along with incremental costs of $1.45 million per year. Daily’s marginal tax rate is 38.00%.

The cost of capital for the firm is 10.00%.

(answer in dollars..so convert millions to dollars)

What is the year 0 cash flow for the project?

Daily Enterprises is purchasing a $10.47 million machine. It will cost $64,199.00 to transport and install the machine. The machine has a depreciable life of five years using the straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.34 million per year along with incremental costs of $1.45 million per year. Daily’s marginal tax rate is 38.00%.

The cost of capital for the firm is 10.00%.

(answer in dollars..so convert millions to dollars)

What is the yearly cash flow from the project?

What is the year 0 cash flow for the project?

The project will run for 5 years. What is the NPV of the project at the current cost of capital?

Answer 1

Depreciation = Total cost of equipment/Useful life

                     = ($ 10,470,000 + $ 64,199) /5

                     = $ 10,534,199 /5 = $ 2,106,839.80

Computation of annual cash flow:

Incremental revenue	$4,340,000.00
Less: Incremental cost	$1,450,000.00
Less: Depreciation	$2,106,839.80
Pretax income	$783,160.20
Tax @ 38 %	$297,600.88
Net income	$485,559.32
Add: Depreciation	$2,106,839.80
Net cash flow	$2,592,399.12

a-

Yearly cash flow for the project is $2,592,399.12

b-

Year 0 cash flow is $ 10,534,199

c-

NPV = PV of cash inflows – Initial investment

     = $ 2,592,399.12 x PVIFA (10 %, 5) - $ 10,534,199

     = $ 2,592,399.12 x [1-(1+0.1)^-5/0.1] - $ 10,534,199

    = $ 2,592,399.12 x [1-(1.1)^-5/0.1] - $ 10,534,199

     = $ 2,592,399.12 x [(1-0.620921323059155)/0.1] - $ 10,534,199

   = $ 2,592,399.12 x (0.379078676940845/0.1) - $ 10,534,199

   = $ 2,592,399.12 x 3.79078676940845 - $ 10,534,199

     = $ 9,827,232.28512211- $ 10,534,199

     = $ (706,966.71487789) or - $ 706,966.71

NPV of the project is - $ 706,966.71