XYZ (same company) is now evaluating the purchase of a new machine for $210,000

Question

XYZ (same company) is now evaluating the purchase of a new machine for $210,000 installed with no NWC change. They plan to sell the machine at the end of 3 years for $40,000. MACRS 3 year depreciation. With the more efficient machine, labor savings per year are expected to be $70,000, $94,000 and $76,000 respectively. 40% tax. The cost of capital for this project is 8.2%

1. What is the initial investment?

210,000

200,000

220,000

180,000

2. What is the project net cash flow (OCF) for year 2?

3. What is the book value at the end of year 3?

194,439

15,561

31,101

210,000

4. What is the terminal cash flow?

5. What is the discounted payback for this project?

3.2 years

2.94 years

2.52 years

2.99 years

6. If the cost of capital for this project is determined to be equal to their WACC (reference question #5), what is the NPV now?

1271.63

6054.33

1,150

(1054.64)

7. What is the IRR?

8%

9.33%

8.57%

8.31%

Explanation / Answer

1)

Intitail investment is $210,000.

Purchase of Equipment - Working capital Requirement = $210,000-0 =$210,000.

2)

Computation of cashflows for the year

Therefore, the cash flow for year 2 is $93,738.

3)

Therefore, the correct answer is option B.

4)

Terminal cash flow is $40,000.

Particulars Year 1 Year 2 year 3 Savings per year(a) 70000 94000 76000 Less: Depreciation(b) 69993 93345 31101 Cash Flows before tax (c =a-b) 7 655 44899 Tax @40% d 2.8 262 17959.6 Cash Flow after tax (e = c-d) 4.2 393 26939.4 Net cash flows f= e+b 69997.2 93738 58040.4

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