Zoltec Corp is considering the purchase of new manufacturing equipment for a lin
ID: 2728132 • Letter: Z
Question
Zoltec Corp is considering the purchase of new manufacturing equipment for a line of products. The cost of the new equipment is $85,000. The company expects the use of the equipment to increase sales by $8,000 annually. The machine belongs to asset class 43 with a CCA rate of 30%, and Zoltec expects to sell the machine at the end of its 5-year operating life for $15,000. The firm expects that the new machine will require an immediate investment of $12,000 in net working capital and the net working capital will increase by 5% each year in the following years. Suppose Zoltec’s marginal tax rate is 34%, and it uses a 10 percent cost of capital to evaluate projects of this nature. What is the NPV of the project?
Explanation / Answer
Zoltec Corp Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 cost of New equipment (85,000) Investment in net working capital (12,000) (12,600) (13,230) (13,892) (14,586) (15,315) Return of NWC= 81,623 Salvage 15,000 Less Tax on $714 of capital gain @34% (243) Increase of sales 8,000 8,000 8,000 8,000 8,000 Depreciaion @30% CCA (25,500) (17,850) (12,495) (8,747) (6,123) Taxable imcome (17,500) (9,850) (4,495) (747) 1,877 Tax @34% 5,950 3,349 1,528 254 (638) Post Tax Income (11,550) (6,501) (2,967) (493) 1,239 Add back depreciation 25,500 17,850 12,495 8,747 6,123 Net Cash flow( including salvage & NWC) (97,000) 1,350 (1,881) (4,363) (6,332) 88,426 PV factor @10% 1 0.909 0.826 0.751 0.683 0.621 PV of cash flows= (97,000) 1,227.27 (1,554.55) (3,278.14) (4,325.02) 54,905.89 NPV = (50,024.54) So NPV of the project is = $ (50,024.54)
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