\"The Norcross Fiber Company is considering automating its piece-goods screen-pr
ID: 2786238 • Letter: #
Question
"The Norcross Fiber Company is considering automating its piece-goods screen-printing system at a cost of $23,000. The firm expects to phase out the new printing system at the end of 5 years due to changes in style. At that time, the firm could scrap the system for $3,000 in today's dollars. The expected net savings (revenue - expenses) due to automation also are in today's (constant) dollars: Year 1 $24,000; Year 2 $14,000; Years 3-5 $9,000. The system qualifies as a 5-year MACRS property and will be depreciated accordingly. The general inflation rate over the next 5 years is 5% per year. Asume the net savings and the scrap value are subject to this inflation rate. The firm's inflation-free MARR is 10%. The firm's tax rate is 41%. What is the net present worth of this automation system? "
Explanation / Answer
The initial outlay for the project is $23000 (as no working capital cost is given)
Let us calculate the depreciation based on 5 year MACRS as below in the excel sheet:
Years
Beginning book value
MACRS
Depreciation
Ending Book Value
1
23000.00
20%
4600.00
18400.00
2
18400.00
32%
5888.00
12512.00
3
12512.00
19.20%
2402.30
10109.70
4
10109.70
11.52%
1164.64
8945.06
5
8945.06
11.52%
1030.47
7914.59
The after tax non operating cashflow = (sales-expense)*(1-tax)+(Tax*Deprecition)
=net saving*(1-tax)+(tax*depreciation)
It is calculated in the excel below:
Years
Net savings
Net saving*(1-tax)
Depreciation
Tax*Depreciation
ATNOCF = Net savings*(1-tax) + (tax*depreciation)
1
24000
14160
4600
1886
16046
2
14000
8260
5888
2414
10674
3
9000
5310
2402
985
6295
4
9000
5310
1165
478
5788
5
9000
5310
1030
422
5732
Terminal year after tax cashflow = salvage+NWCinv-Tax(salvage-bookvalue)
Salvage = 3000 and bookvalue at the end of 5th year is 7914.59 with tax rate of 41%
thus
=3000+0 - 0.41*(3000-7914.59)
=3000 - (-2015)
= 5015
Thus NPV is calculated as below:
Years
Net savings
Net saving*(1-tax)
Depreciation
Tax*Depreciation
ATNOCF = Net savings*(1-tax) + (tax*depreciation)
0
-23000
1
24000
14160
5888
2414
16574
2
14000
8260
2402
985
9245
3
9000
5310
1165
478
5788
4
9000
5310
1030
422
5732
5
9000
5310
0
0
10325
NPV @ 10% MARR
$13,074.92
Years
Beginning book value
MACRS
Depreciation
Ending Book Value
1
23000.00
20%
4600.00
18400.00
2
18400.00
32%
5888.00
12512.00
3
12512.00
19.20%
2402.30
10109.70
4
10109.70
11.52%
1164.64
8945.06
5
8945.06
11.52%
1030.47
7914.59
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