You are considering the purchase of a new machine for a project. Details of this

Question

You are considering the purchase of a new machine for a project. Details of this potential purchase are provided below.
-The project life is 3 years.
The machine costs $151,000.
* You will pay cash for half of this machine immediately, and will borrow the remaining half at 8.3% annual rate compounded annually over 3 years.
* The machine will be depreciated using a seven year MACRS approach.
Annual O&M costs (expenses) of the machine are $19,000.
Annual labor savings (revenues) are $107,000.
Salvage value at the end of year 3 will be $53,500.
Working capital requirement is initially $33,000. Any investment in working capital will be recovered at the end of the project.
Assume an income tax rate and gains tax rate of 38%.
Find the NPW of this project based on a MARR of 16.9%

Explanation / Answer

Solution:

Finding out NPV of projects through after-tax cash flows statement:

Notes:

1)

Interest has been calculated at the given rate on debt amount of 75,500 (Half of investment)

MACRS Schedule

Year Particulars 1 2 3 Savings (Revenue) 107000.00 107000.00 107000.00 O&M (Expenses) -19000.00 -19000.00 -19000.00 EBITDA 88000.00 88000.00 88000.00 Depreciation (MACRS) -21577.90 -36979.90 -26409.90 Interest @ 8.3% -6266.50 -6266.50 -6266.50 PBT 60155.60 44753.60 55323.60 Tax @38% -22859.13 -17006.37 -21022.97 PAT 37296.47 27747.23 34300.63 Add: Dep 21577.90 36979.90 26409.90 Add: Salvage Value 53500.00 Less: Initial Working Capital -33000.00 Add: Working Capital Release 33000.00 After Tax Cash Flow 25874.37 64727.13 147210.53 Present Value (PV) of Cash Flows 22133.77 47364.98 92150.00 (Discounted at MARR of 16.9%) Sum of PV of Cash Flows 161648.75 Less: Investment -151000.00 NPV of the Project 10648.75

Notes:

1)

Interest has been calculated at the given rate on debt amount of 75,500 (Half of investment)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.