Question

Quip Corporation wants to purchase a new machine for $284,000. Management predicts that the machine will produce sales of $187,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $78,000 per year. The firm uses straight-line depreciation with $50,000. Quip's combined income tax rate, t, is 20% assumed residual (salvage) value of Management requires a minimum after-tax rate of return of 10% on all investments. What is the estimated net present value (NPV) of the proposed investment (rounded to the nearest hundred dollars)? (The PV annuity factor for 10%, 5 years, is 3.791 and for 4 years it is 3.17. The present value $1 factor for 10 %, 5 years, is 0.621.) Assume that after-tax cash inflows occur at year-end Multiple Choice $82,100. $113,100. $132,300. $145,300 $103,300

Answer 1

Annual depreciation = (284000-50000)/5 = $46,800

	Amount
Sale	$187000
Less: Cost	78000
Less: Depreciation	46800
Profit before tax	$62200
Less: Tax (62200*20%)	12440
Add: Depreciation	46800
Annual cash inflows	$96560

NPV = present value of Annual cash inflows + present value of of salvage value - Initial investment

= $96560*3.791+50000*0.621-284000

= $113,100