Whoopie Cushions, Inc. is analyzing the proposed purchase of a new machine for $
ID: 2751920 • Letter: W
Question
Whoopie Cushions, Inc. is analyzing the proposed purchase of a new machine for $550,000. The proposed machine has an estimated economic life of six years but will be treated as five-year MACRS property for depreciation purposes. The machine will increase the firm's capacity, and it is expected to contribute $176,000 annually to earnings before depreciation, interest and taxes. The firm is in a 30% tax bracket and estimates its cost of capital to be 16%. Calculate the NPV of this investment using an Excel spreadsheet. Show and label your work. Formulas for NPV and IRR are preprogrammed in Excel.
Explanation / Answer
Initial cash outflow = 550000
From year 1, positive cash flows generated = 176,000
These cash flows have to considered after tax (Calculations done in below table)
Since machine is depreciated using MACRS 5 year method, machine is depreciated 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76% from year 1 till year 6 respectively
On the depreciated value, the company will get a positive depreciation tax shield
All the cash flows are calculated in below table
NPV can be calculated as
NPV =NPV(16%,G3:G8) - 550000 = $15,391.52
IRR can be calculated as follows
IRR = IRR(G2:G8) = 17.09%
Year Cash flow Tax Rate After tax Cash Flow Machine Depreciation value Depreciation Tax Shield Total net cash flows 0 (550,000.00) 30% (550,000.00) - - (550,000.00) 1 176,000.00 30% 123,200.00 110,000.00 33,000.00 156,200.00 2 176,000.00 30% 123,200.00 176,000.00 52,800.00 176,000.00 3 176,000.00 30% 123,200.00 105,600.00 31,680.00 154,880.00 4 176,000.00 30% 123,200.00 63,360.00 19,008.00 142,208.00 5 176,000.00 30% 123,200.00 63,360.00 19,008.00 142,208.00 6 176,000.00 30% 123,200.00 31,680.00 9,504.00 132,704.00Related Questions
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