Thornley Machines is considering a 3-year project with an initial cost of $570,0

Question

Thornley Machines is considering a 3-year project with an initial cost of $570,000. The project will not directly produce any sales but will reduce operating costs by $305,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $63,000. The tax rate is 34 percent. The project will require $13,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 9 percent? Why or why not? O yes; The NPV is $132,21703 O no; The NPV is $145,21703 O yes: The NPV is $186,083.54 O yes; The NPV is $66,380.00 O yes: The NPV is $68,333.51

Explanation / Answer

Yes the NPV is              132,217.03 Statement showing Cash flows Particulars Time PVf 9% Amount PV Cash Outflows - Initial Invt                             -                          1.00             (570,000.00)         (570,000.00) Cash Outflows - Working Capital                             -                          1.00               (13,000.00)            (13,000.00) PV of Cash outflows = PVCO         (583,000.00) Cash inflows                         1.00                    0.9174               265,900.00            243,944.95 Cash inflows                         2.00                    0.8417               265,900.00            223,802.71 Cash inflows                         3.00                    0.7722               265,900.00            205,323.59 Cash inflows - Release of WC                         3.00                    0.7722                 13,000.00              10,038.39 Cash inflows - Sale of asset                         3.00                    0.7722                 41,580.00              32,107.39 PV of Cash Inflows =PVCI            715,217.03 NPV= PVCI - PVCO            132,217.03 Reduction in operating expenses            305,000.00 Less Depreciation= 570000/3         (190,000.00) Net Savings before tax            115,000.00 Tax at 34%            (39,100.00) Net Savings after tax              75,900.00 Add depreciation            190,000.00 Cash flow after tax            265,900.00 Sale Value              63,000.00 Proceeds net of tax = 63000(1-.34)              41,580.00

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