A company is considering the purchase of a new equipment. The equipment costs $3

Question

A company is considering the purchase of a new equipment. The equipment costs $350,000, and an additional $110,000 is needed to install it. The equipment will be depreciated straight-line to zero over five-year life. The equipment will generate additional annual revenue of $265,000 and it will have annual cash operating expenses of $83,000. The equipment will be sold for $85,000 after five years. An inventory investment of $73,000 will be required during the start of the project. If the tax rate is 40% and the required return is 10%, what is this project

Explanation / Answer

Outlay = FCInv + NWCInv Sal0 + T(Sal0 B0)

Outlay = (350,000 + 110,000) + 73,000 0 + 0 = $533,000

The installed cost is $350,000 + $110,000 = $460,000,

so the annual depreciation is $460,000/5 = $92,000.

The annual after-tax operating cash flow for Years 15 is

CF = (S C D)(1 T) + D = (265,000 83,000 92,000)(1 0.30) + 92,000

CF = $155,000

The terminal year after-tax non-operating cash flow in Year 5 is

TNOCF = Sal5 + NWCInv T(Sal5 B5) = 85,000 + 73,000 0.30(85,000 0)

TNOCF = $132,500

The NPV is 5 155,000

132,500 +

= $136,844 answer

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