home / study / questions and answers / business / finance / you have been asked
ID: 2458755 • Letter: H
Question
home / study / questions and answers / business / finance / you have been asked by the president of your company ... Your question has been answered! Rate it below. Let us know if you got a helpful answer. Question You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose machine. The machine's basic price is $1,000,000 and our accountant requires that it be written off over its 5 year class using straight line depreciation to a book value of $0. Purchase of the machine would require an increase in net working capital of $20,000 at t=0 only. The machine would increase the firm's before tax revenues by $960,000 per year but would also increase operating costs by $100,000 per year. It is expected to be used for 3 years and then be sold for $800,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 18 percent. (Please show your work)
a) What is the net investment required at t=0?
b) What are the operating cash flows each year?
c) What is the total value of ending (non operating) cash flow in year 3?
d) What is the project's NPV?
Explanation / Answer
Net investment required at t = 0 is
Machine cost = 1000000
Working Capital = 20000
Total = 10,20,000
Operating cashflow would be
Net Revenue = 960000
(-)Operating cost = 100000
(-) Depreciation = 200000
Net income = 660000
- Tax @ 40% = 264000
Profit = 396000
+ Depreciation = 200000
Operating Cashflow = 596000
Ending value in year 3 is
Sales price = 800000
- Accumulated Depreciation ( 1000000 * 3/5) = 600000
Gain = 200000
Tax @40% = 80000
Net Gain = 120000
Non Operating Cash flow = 800000 - Tax = 720000
NPV = PV of inflows - PV of outflow
= 596000 PVIFA(18%,5) + 720000 PVIF(18%.3) - 1020000
= 1863793 + 438214 - 1020000
=1282007.228Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.