A company is considereing the purchase of a computer costing $500,000 with an ec

Question

A company is considereing the purchase of a computer costing $500,000 with an economic life of 5 years. the computer will be fully depreciated over 5 years using the straight line method. the market value of the computer will be $100,000 in five years. the computer will replace division employees whose salaries combined total is $120,000 per year. The computer will also immediately lower the firm's required net working capital by $100,000. This amount of net working capital will be replaced once the computer is sold. The corporate tax rate is 34%.

What is:

Salvage value taxes?

Aftertax salvage value?

Cash flow outlay?

OCF for the year?

NPV adding back net working capital in year 5?

Explanation / Answer

Hi,

Please find the answers as follows:

Salvage Value Taxes = 100000*.34 = 34000

After Tax Salvage Value = 100000*(1-.34) = 66000

Cash Flow Outlay = -(500000 - 100000) = -400000

OCF for the Year = 120000*(1-.34) + 500000/5*(.34) = 113200

NPV (Assuming 12% discount rate) = = - 400000 + 113200/(1+0.12)^1 + 113200/(1+0.12)^2 + 113200/(1+0.12)^3 + 113200/(1+0.12)^4 + 113200/(1+0.12)^5 + 66000/(1+0.12)^5 - 100000/(1+0.12)^5 = - 11231.8

Thanks.

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