Question

Tocserp is considering the purchase of a new machine that will produce widgets. The widget maker will require an initial investment of $12,000 and has an economic life of five years and will be fully depreciated by the straight line method. The machine will produce 1,400 widgets per year with each costing $2.00 to make. Each will be sold at $4.50. Assume Tocserp uses a discount rate of 14 percent and has a tax rate of 34 percent. What is the NPV of the project and should Tocserp make the purchase.

Please show work.

No, NPV = -1268.19

No, NPV = -3373.45

Yes, NPV = 15.78

No, NPV = -602.17

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-12000
=Initial Investment outlay		-12000
Unit sales			1400	1400	1400	1400	1400
Profits	=no. of units sold * (sales price - variable cost)		3500	3500	3500	3500	3500
-Depreciation	Cost of equipment/no. of years		-2400	-2400	-2400	-2400	-2400
=Pretax cash flows			1100	1100	1100	1100	1100
-taxes	=(Pretax cash flows)*(1-tax)		726	726	726	726	726
+Depreciation			2400	2400	2400	2400	2400
=after tax operating cash flow			3126	3126	3126	3126	3126
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							0
Total Cash flow for the period		-12000	3126	3126	3126	3126	3126
Discount factor=	(1+discount rate)^corresponding period	1	1.14	1.2996	1.481544	1.6889602	1.9254146
Discounted CF=	Cashflow/discount factor	-12000	2742.105263	2405.3555	2109.961	1850.8429	1623.5464
NPV=	Sum of discounted CF=	-1268.188891