Cash flows estimation and capital budgeting: You are the head of finance departm

Question

Cash flows estimation and capital budgeting: You are the head of finance department in XYZ Company. You are considering adding a new machine to your production facility. The new machine’s base price is $10,000.00, and it would cost another $2,140.00 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after three years for $1,750.00. The machine would require an increase in net working capital (inventory) of $810.00. The new machine would not change revenues, but it is expected to save the firm $33,605.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 34.00%. If the project's cost of capital is 15.90%, what is the NPV of the project?

choices are

$51,685.16 $41,348.12 $12,140.00 $10,000.00 $24,014.02

Explanation / Answer

Calculation of NPV of the project Year 0 1 2 3 NPV New machine base price -$10,000.00 Installation cost -$2,140.00 Increase in net working capital -$810.00 Recovery of working capital $810.00 Saving in before tax operating cost $33,605.00 $33,605.00 $33,605.00 Tax on saving in before tax operating cost -$11,425.70 -$11,425.70 -$11,425.70 Tax saving on depreciation $1,375.73 $1,834.72 $611.30 After tax salvage value $1,460.86 Net Cash flow -$12,950.00 $23,555.03 $24,014.02 $25,061.45 Discount factor @ 15.90% 1 0.86281277 0.744445875 0.64231741 Present Values -$12,950.00 $20,323.58 $17,877.14 $16,097.41 $41,348.12 NPV of the project $41,348.12 Calculation of depreciation using MACRS 3-year class rates and tax saving due to depreciation Year Capitalised cost Depreciation rates Depreciation Tax saving @ 34% 1 $12,140.00 33.33% $4,046.26 $1,375.73 2 $12,140.00 44.45% $5,396.23 $1,834.72 3 $12,140.00 14.81% $1,797.93 $611.30 $11,240.43 Calculation of after tax salvage value of machine Capitalised cost of machine $12,140.00 Less : Accumulated Depreciation $11,240.43 Book value of machine after 3 year $899.57 Salvage value $1,750.00 Gain on salvage value of machine $850.43 Tax @ 34% on Gain $289.14 After tax salvage value (Salvage value - tax) $1,460.86

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

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