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4. Pattys Pickles is looking at a new pickle packaging system with an installed cost of $490,000. This cost will be deprecia
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Answer #1
Time line 0 1 2 3 4 5 6 7
Cost of new machine -490000
Initial working capital -25000
=Initial Investment outlay -515000
100.00%
Profits 120000 120000 120000 120000 120000 120000 120000
-Depreciation Cost of equipment/no. of years -70000 -70000 -70000 -70000 -70000 -70000 -70000 0 =Salvage Value
=Pretax cash flows 50000 50000 50000 50000 50000 50000 50000
-taxes =(Pretax cash flows)*(1-tax) 39500 39500 39500 39500 39500 39500 39500
+Depreciation 70000 70000 70000 70000 70000 70000 70000
=after tax operating cash flow 109500 109500 109500 109500 109500 109500 109500
reversal of working capital 25000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 39500
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 64500
Total Cash flow for the period -515000 109500 109500 109500 109500 109500 109500 174000
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928 1.5735194 1.7623417 1.9738227 2.210681407
Discounted CF= Cashflow/discount factor -515000 97767.85714 87292.72959 77939.93714 69589.23 62133.241 55476.108 78708.76347
NPV= Sum of discounted CF= 13907.87
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