Thornley Machines is considering a 3-year project with an initial cost of $750,0

Question

Thornley Machines is considering a 3-year project with an initial cost of $750,000. The project will not directly produce any sales but will reduce operating costs by $420,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $81,000. The tax rate is 34 percent. The project will require $19,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 15 percent? Why or why not?

no; The NPV is $124,627.76

yes; The NPV is $175,783.00

yes; The NPV is $105,627.76

yes; The NPV is $20,788.44

yes; The NPV is $108,860.00

Explanation / Answer

Initial cost = 750000+ 19000 = 769000

2)Depreciation per year = 750000/ 3 = $ 250000

Tax savings on depreciation = 250000 * 34% = 85000

b)After tax savings on operating cost = 420000(1-.34) = 277200

c)Total cash inflow each year = 277200+ 85000 = 362200

d) After tax salvage at year3 = 81000(1-.34) = 53460

Total cash inflow for year 3 = 53460 +19000 (working capital realised at year3 ) = 72460

Present value of cash inflow =(PVAF@15%,3*Annual CF)+(PVF@15%,3* Total CF for year3)

                 = (2.28323* 362200)+   (.65752 * 72460)

               = 826984.14+ 47643.90

           = $ 874628.04

NPV = 874628.04 - 769000 = $ 105,628.04

Correct option is "C" -yes; The NPV is $105,627.76     [approx to 105628 ,difference dut to decimal in PV factors]

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.