A bank has decided to purchase an ATM (automated teller machine) for $110,000 th
ID: 2642859 • Letter: A
Question
A bank has decided to purchase an ATM (automated teller machine) for $110,000 that has an estimated life of 6
years and can be depreciated to no value during its useful life. Maintenance over that period will begin at $2,500
annually and increase by 8% per year. If the ATM is purchased, the bank will not be required to hire one
additional (human) teller. Including fringe benefits, the teller costs $20,000 per year, and this amount is
expected to increase 5% annually. The bank's cost of capital is 10% and pays a corporate tax rate of 35%.
Determine the incremental cash flow in each year of the ATM's useful life (including the initial purchase in year
0), then use these figures to calculate the NPV of this purchase.
Explanation / Answer
Year Annual Increase Amount of cash flow Corp tax(1-0.35) Amount After tax PV @10% Factor PV of cash Flow Purchase of ATM now 110000 1 110000 Saving of one human teller fring benefits due to ATM machine 1 - 20,000.00 0.65 13,000.00 0.91 11,818.18 2 1,000.00 21,000.00 0.65 13,650.00 0.83 11,280.99 3 1,050.00 22,050.00 0.65 14,332.50 0.75 10,768.22 4 1,102.50 23,152.50 0.65 15,049.13 0.68 10,278.75 5 1,157.63 24,310.13 0.65 15,801.58 0.62 9,811.54 6 1,215.51 25,525.63 0.65 16,591.66 0.56 9,365.56 Total Saving 63,323.25 Maintenance charge paid due to ATM 1 2,500.00 0.65 1,625.00 0.91 1,477.27 2 200.00 2,700.00 0.65 1,755.00 0.83 1,450.41 3 216.00 2,916.00 0.65 1,895.40 0.75 1,424.04 4 233.28 3,149.28 0.65 2,047.03 0.68 1,398.15 5 251.94 3,401.22 0.65 2,210.79 0.62 1,372.73 6 272.10 3,673.32 0.65 2,387.66 0.56 1,347.77 Total Charges 8,470.38 NPV of project= PV of Cash inflow -PV cash Out flow =(63323.25-8470.38)-110000=-55147.13
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