Question

Excelsior Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $260,000, and installation costs would amount to $28,000. An additional $14,000 in net working capital would be required at installation. The machine has a class life of 3 years. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the firm plans to sell the machine for $120,000. The firm has a required rate of return on investment projects of 12% and a marginal tax rate of 34%. What is the NPV of the project?

Current example on Chegg is done in an excel file without actually showing the calculations, thank you!

Answer 1

Calculation of depreciation of Machine
S.No.	Particulars								Reference	Amount
1	Base Price of Machine								A	260000
2	Installation cost								B	28000
3	Total Cost of machine								C=A+B	288000
4	Life of machine in years								D	3
5	Depreciation per annum								E=C/D	96000
Note
1	Sale value of machine is given in question but it is not scrap value hence not reduced for the purpose of depreciation.
2	It is assumed that company is following straight line of depreciation.
3	Depreciation charged for its useful life.
Calculation of NPV
S.No.	Years	Cash outflow	Saving of cost/ Sale of machine/ Realese of net working Capital	Depreciation	Profit before tax	Tax @ 34%	Profit After Tax	Cash Flow	Discount Rate @ 12 %	Present Value
A	B	C	D	E	F=D-E	G	H=F-G	I	J	K=I X J
1	0	-302000			-302000		-302000	-302000	1.0000	-302000
2	1		110000	96000	14000	4760	9240	105240	0.8929	93964
3	2		110000	96000	14000	4760	9240	105240	0.7972	83897
4	3		110000	96000	14000	4760	9240	105240	0.7118	74908
5	4		110000		110000	37400	72600	72600	0.6355	46139
6	5		110000		110000	37400	72600	72600	0.5674	41195
7			134000		134000	45560	88440	88440	0.5674	50183
		Net present Value								88286
Notes
1	It is assumed that sale of plant is also taxable at the same rate of taxation.
2	It is also assumed that net working capital will be released at the end of 5th year.