Question

A company is considering an investment (at time = 0) in a wire and cable making machine. The cost of the machine is 44,741 dollars with zero expected salvage value. Annual production during the 3-year life of the machine is expected to be (starting at time = 1) 4,738, 8,973, and 13,807 units. The sale price per unit of wire is 13 dollars in year one, and then the price is expected to increase by 5% per year. Production costs per unit will be 5 dollars in year one, and then production costs are expected to increase by 4% per year. Depreciation on the machine is 12,217 dollars per year, the tax rate is 40% per year, and the minimum acceptable rate of return is 14% percent per year, compounded annually. Calculate the net present value of this investment. Assume all flows are at the end of each year. (note: round your answer to the nearest cent, and do not include spaces, currency signs, plus or minus signs, or commas)

Answer 1

Net cash flow = Annual revenue - Annual cost

Taxable income = Net cash flow - Depreciation

Tax = Tax rate * Taxable income

ATCF = Taxable income - Tax + Depreciation

Using Excel

Year	Initial cost	Revenue	O&M cost	Depreciation	Salvage value	TI	Tax	ATCF
0	-44741.00							-44741.00
1		61594.00	-23690.00	12217.00		25687.00	10274.80	22491.80
2		122481.45	-46659.60	12217.00		63604.85	25441.94	37658.94
3		197888.83	-74668.26	12217.00	0.00	111003.57	44401.43	56618.43
							NPW	42181.81

Showing formula in excel

Year	Initial cost	Revenue	O&M cost	Depreciation	Salvage value	TI	Tax	ATCF
0	-44741							=B135
1		=4738*13	=-(5*4738)	12217		=C136+D136-E136+F136	=G136*0.4	=H136+E136
2		=13*1.05*8973	=-5*1.04*8973	12217		=C137+D137-E137+F137	=G137*0.4	=H137+E137
3		=13*1.05*1.05*13807	=-5*1.04*1.04*13807	12217	0	=C138+D138-E138+F138	=G138*0.4	=H138+E138
							NPW	=NPV(14%,I136:I138)+I135