8.7. Leila Liverpool is looking into the possibility of buying several coin-oper

Question

8.7. Leila Liverpool is looking into the possibility of buying several coin-operated vending machines and placing them in the local hospitals. Each machine costs $3200, which she will depreciate on a straight-line basis over 10 years. The machine will dispense Coke cans at $1.50 each and Coca Cola Company will replenish them at 65 cents each. Each machine is expected to sell 450 cans a month. The hospitals will provide the space and electricity for the machines for $325 a month at the end of every month. The tax rate of Leila Liverpool is 30% and the after-tax cost of capital 15%. Assume that the income and bills occur at the end of each month, but she pays the taxes annually. Should Leila Liverpool get into this venture?

ANSWER: NPV = $193.07, no ; PLEASE SHOW SOLUTIONS.

Explanation / Answer

First we have to find the monthly EBIT on this machine

EBIT = revenue - cost = 450 * 1.5 - 450 * 0.65 - 325 = $57.5

This is a monthly return form this machine, now find the FV of this cash flow at the end of the year using the formula as follows

=FV(15%/12,12,57.5,0,0) = $718.77

Here 15% is interest rate, entered as 15%/12 for monthly interest rate

12 is number of payments received and 57.5 is payment received each month

Now cash flows of this project for 10 years are entered into the following table

Depreciation tax shield = Depreciation * Tax

Total Net cashflow = cash flow from operations + Depreciation tax shield

NPV for these cash flows can be calculated as follows

NPV =NPV(15%,G3:G12) - 3200 = $193.07

Since the NPV for this project is negative, the firm should not go ahead with the machine

Year Cash flow Tax Rate After tax Cash Flow Machine Depreciation value Depreciation Tax Shield Total net cash flows 0 -3200 30%              (3,200.00)                          -                              -                (3,200.00) 1 718.77 30%                    503.14                320.00                     96.00                    599.14 2 718.77 30%                    503.14                320.00                     96.00                    599.14 3 718.77 30%                    503.14                320.00                     96.00                    599.14 4 718.77 30%                    503.14                320.00                     96.00                    599.14 5 718.77 30%                    503.14                320.00                     96.00                    599.14 6 718.77 30%                    503.14                320.00                     96.00                    599.14 7 718.77 30%                    503.14                320.00                     96.00                    599.14 8 718.77 30%                    503.14                320.00                     96.00                    599.14 9 718.77 30%                    503.14                320.00                     96.00                    599.14 10 718.77 30%                    503.14                320.00                     96.00                    599.14

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