Talia’s Tutus is considering purchasing a new sewing machine. The old machine it

Question

Talia’s Tutus is considering purchasing a new sewing machine. The old machine it has right now was bought 2 years ago for $30,000, with an assume life of 5 years and an assume salvage value of $5,000. The firm uses straight-line depreciation. The old machine can be sold for $25,000. The new machine can be purchased today for $40,000. The new machine will have a 5-year life and will be depreciated to $5,000 using straight-line depreciation. With the new sewing machine, the firm is expected to have additional revenue of $15,000 for each of the next five years. The variable cost is 40% of the revenue, and the fixed cost is $3,000 each year. Suppose Talia’s Tutus allows its customers to pay their bills with an average 3-month delay, and its inventories are 15% of next year’s expense. If the opportunity cost of capital is 12%, corporate tax rate is 35%, and capital gain tax is 15%, what are the project’s NPV and IRR? please post step by step

Explanation / Answer

Capital gain tax is just paidin current year time ., Machine purchase at start of year , revenue generated at end of year.

(2) yrs (1) yrs 0yr 1 yr 2yr 3yrs 4yr 5yr Old machine Cost of machine $30,000 Depreciation ($5,000) ($5,000) Book value $25,000 $20,000 $20,000 Selling price $25,000 Profit from sell of machine $5,000 New machine Cost $40,000 addition cost required ( selling price- cash received from sells of old machine ($15,000) Inventory (@15% of total expanses ) ($1,350) Additional cost in Bill for 3months 15000/12*3 months ($3,750) Net cash outflow ($20,100) Revenue $15,000 $15,000 $15,000 $15,000 $15,000 Fixed cost ($3,000) ($3,000) ($3,000) ($3,000) ($3,000) Variablecost (@40% of revenue) ($6,000) ($6,000) ($6,000) ($6,000) ($6,000) Net operating income $6,000 $6,000 $6,000 $6,000 $6,000 Income tax purpose Depreciation ($5,000) ($5,000) ($5,000) ($5,000) ($5,000) Taxable income $1,000 $1,000 $1,000 $1,000 $1,000 Capital gain tax ($750) $0 $0 $0 $0 Income tax ($350) ($350) ($350) ($350) ($350) Net income after tax $4,900 $5,650 $5,650 $5,650 $5,650 PV $4,375.000 $4,504.145 $4,021.558 $3,590.677 $3,205.962 NPV ($402.657) Cost of capital 12.00% Incometax 35% IRR 11.21% Capitalgain tax 15%

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