Calculate the NPW (15%) and Should the machine be bought? Explain why or why not

Question

Calculate the NPW (15%)

and

Should the machine be bought? Explain why or why not,

You plan to purchase a component pick-and-place machine for $65,000. You plan to use it for 6 years and the salvage value in 6 years is expected to be $0. The machine will incur $12,000 in operating and maintenance costs each year, but you expect it will save $35,000 per year in labor. your firm's tax rate is 40% and after-tax MARR is 15%. The machine will be depreciated according to five year MACRS. Find the missing Income Statement and Cash Flow Statement information Calculate the NPW(15%).

Explanation / Answer

Yes, machine should be bought because of positive NPW

Income Statement 0 1 2 3 4 5 6 Revenues 35000 35000 35000 35000 35000 35000 Expenses O&M 12000 12000 12000 12000 12000 12000 Depreciation 13000 20800 12480 7488 7488 3744 Taxable income 10000 2200 10520 15512 15512 19256 Income Tax          4,000            880         4,208         6,205         6,205         7,702 Net incmoe          6,000         1,320         6,312         9,307         9,307      11,554 Cash flow statement Net incmoe          6,000         1,320         6,312         9,307         9,307      11,554 Depreciation 13000 20800 12480 7488 7488 3744 Investment Activities Initial -65000 Salvage 0 Cash flow -65000 19000 22120 18792 16795 16795 15298 NPW = -65000+ 19000/1.15 + 22120/1.15^2 + 18792/1.15^3 + 16795/1.15^4 + 16795/1.15^5 +15298/1.15^6= 5170.15

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