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Tocserp is considering the purchase of a new machine that will produce widgets. The widget maker...

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

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago
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