A firm is evaluating a cost-saving project that is expected to save the firm $22
ID: 2734012 • Letter: A
Question
A firm is evaluating a cost-saving project that is expected to save the firm $225,000 before taxes each year. The company’s tax rate is 30%. The project requires equipment that will cost $1.35 million to install. The equipment has a 10-year lifetime and its value will be depreciated to zero over its life. It is expected that the equipment will be able to be sold for $50,000 in 10 years. The project also requires an initial net working capital investment of $5,000, which will be recouped at the end of the project. The required return for this project is 10%. a. (8 points) Find the project NPV. b. (3 points) Find project PI. c. (3 points) Find project payback period. d. (2 points) Should they pursue the project? Why or why not?
Explanation / Answer
Annual savings Particulars a Savings due to equipment 225000 b Depreciation -130000 c Tax 28500 d Net saving per annum 196500 Year Particulars Cash flows PV Factor PV of Cashflows Cumulative Cash flows Cost of Equipment -1350000 1 -1350000 -1350000 Working Capital -5000 1 -5000 -1355000 1 Saving of Costs 196500 0.909091 178636.3636 -1158500 2 Saving of Costs 196500 0.826446 162396.6942 -962000 3 Saving of Costs 196500 0.751315 147633.3584 -765500 4 Saving of Costs 196500 0.683013 134212.144 -569000 5 Saving of Costs 196500 0.620921 122011.04 -372500 6 Saving of Costs 196500 0.564474 110919.1273 -176000 7 Saving of Costs 196500 0.513158 100835.5702 20500 8 Saving of Costs 196500 0.466507 91668.70021 217000 9 Saving of Costs 196500 0.424098 83335.18201 413500 10 Saving of Costs 196500 0.385543 75759.25637 610000 10 Sale of Asset 50000 0.385543 19277.16447 660000 10 Working Capital 5000 0.385543 1927.716447 665000 NPV -126387.6828 Board Pay Back = 7year+ (176000/(176000+20500))*365= 1 year 326 days Project should not be taken up as NPV is negetive
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