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Question 30 1 point Number Help Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 18,000 dollars. It would be depreciated straight-line to 2,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 3,100 dollars. The system is expected to reduce costs by 5,500 dollars in year 1 and by 13,700 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 7.74 percent, what is the net present value of the new purification system project? Number

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A В C D E 1 2 Year 0 1 -$18,000.00 Initial Cost 4 Annual Benefit $13,700.00 $8,000.00 $5,700.00 $2,850.00 $2,850.00 $5,500.00 $8,000.00 -$2,500.00 -$1,250.00 -$1,250.00 6 Depreciation 7 ЕBT |Таx(50%) Net Benefit 9 10 11 Operationg Cash Flow After tax salvage value After tax Net Cash Flow $6,750.00 $10,850.00 12 13 3100 -$18,000.00 $6,750.00 $13,950.00 14 15 Cost of capital 16 7.74% 17 $282.75 Net Present value 18 19 20 st LC LC

Cell reference -

A В C D E 1 Year 2 Initial Cost -18000 Annual Benefit 5500 13700 = (-C4-2000)/2 Depreciation D7 - E6-E7 -D6 - D7 ЕВT Tax(50%) Net Benefit =D8*0.5 E8*0.5 -E8-E9 10 -D8- D9 11 Operationg Cash Flow After tax salvage value After tax Net Cash Flow =E10+E7 =D10+D7 3100 -E12+ E13 -C4 - D12 + D13 0.0774 Cost of capital C14+NPV(C16,D14:E14) Net Present value

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