Creighton Industries is considering the purchase of a new strapping machine whic

Question

Creighton Industries is considering the purchase of a new strapping machine which will cost $120,000 plus the additional 7,500 to ship and install.The new machine will have a 5-year useful life and will be depreciated tozero using the straight line method. The machine is expected to generate new sales of $25,000 per yearand is expected to save $17,000 in labor and electrical expenses over the next 5 years.The machine is expected to have a salvage value of $30,000. Creighton uses 13.5% discount rate for capital budgeting purposes and the firms's income tax rate is 40%. What is the machine's NPV?

Explanation / Answer

Rate of return r 13.50% Formula Case -> A Cash flow PV of Cash flow Year Cash flow PV of cash flow Expanation A A/(1+r)^0 0 -127,500 $ (127,500.00) Investment -127500 B B/(1+r)^1 1 51,600 $    45,462.56 New sales + costs saved + tax saved on depreciation 25000+17000+(120000/5)*(40%) C C/(1+r)^2 2 51,600 $    40,055.11 New sales + costs saved + tax saved on depreciation 25000+17000+(120000/5)*(40%) D D/(1+r)^3 3 51,600 $    35,290.85 New sales + costs saved + tax saved on depreciation 25000+17000+(120000/5)*(40%) E E/(1+r)^4 4 51,600 $    31,093.26 New sales + costs saved + tax saved on depreciation 25000+17000+(120000/5)*(40%) F F/(1+r)^5 5 81,600 $    43,322.23 New sales + costs saved + tax saved on depreciation + Salvage 25000+17000+(120000/5)*(40%)+30000 NPV (needs to be >=0 to be feasible Sum of above PVs of cash flow NPV(A) $67,724.0140 = ANswer

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