Question

Western Textiles is considering an investment in a new weaving machine. This machine is for a growth opportunity, so the new machine will not replace an existing machine. The new machine is priced at $214,000 and will require installation costing $26,000. WT plans to use the machine for 4 years, while it will be depreciated using the MACRS method over its 3-year class life, and then plans to sell the machine at its expected salvage value of $80,000 at the end of Year 4. The machine will require a $20,000 increase in net working capital. It is expected to generate additional sales revenues of $125,000 per year, but its use also will increase annual cash operating expenses by $55,000. WT’s required rate of return is 10 percent, and its marginal tax rate is 40 percent. The machine’s book value at the end of Year 4 will be $0, so WT will have to pay taxes on the $80,000 salvage value. Enter answers in numeric format with no special characters or symbols.

What is the initial cash outflow at T0 for this project?

What is the Depreciation expense for year 1 through year 4?

What is the supplemental operating cash flow for Year 1 through year 4?

What is the Net Present Value for this project?

What is the Internal Rate of Return for the project?

Answer 1

Tax rate		40%
	Year-0	Year-1	Year-2	Year-3	Year-4
Sale		125,000	125,000	125,000	125,000
Less: Operating Cost		55,000	55,000	55,000	55,000
Contribution		70,000	70,000	70,000	70,000
Less: Depreciation as per table given below		79,992	106,680	35,544	17,784
Profit before tax		(9,992)	(36,680)	34,456	52,216
Tax		(3,997)	(14,672)	13,782	20,886
Profit After Tax		(5,995)	(22,008)	20,674	31,330
Add Depreciation		79,992	106,680	35,544	17,784
Cash Profit After tax		73,997	84,672	56,218	49,114
Cost of machine			240,000
Depreciation			240,000
WDV			-
Sale price			80,000
Profit/(Loss)			80,000
Tax			32,000
Sale price after tax			48,000
Depreciation		Year-1	Year-2	Year-3	Year-4		Total
Cost		240,000	240,000	240,000	240,000
Dep Rate		33.33%	44.45%	14.81%	7.41%
Deprecaition		79,992	106,680	35,544	17,784		240,000
Calculation of NPV
						10.00%
Year		Captial	Working captial	Operating cash	Annual Cash flow	PV factor	Present values
0		(240,000)	(20,000)		(260,000)	1.000	(260,000)
1				73,997	73,997	0.909	67,270
2				84,672	84,672	0.826	69,977
3				56,218	56,218	0.751	42,237
4		48,000	20,000	49,114	117,114	0.683	79,990
					Net Present Value		(526)
Calculation of IRR
			9.00%		10.00%
Year		Total cash flow	PV factor @ 9%	Present values	PV factor @ 10%	Present values
0		(260,000)	1.000	(260,000)	1.000	(260,000)
1		73,997	0.917	67,887	0.909	67,270
2		84,672	0.842	71,267	0.826	69,977
3		56,218	0.772	43,410	0.751	42,237
4		117,114	0.708	82,966	0.683	79,990
				5,530		(526)
		IRR	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
		IRR	'=9%+ (10%-9%)*(5530.22/(5530.22-(-526.04)
			9.913%