Question

Market Top Investors, Inc., is considering the purchase of a $345,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method, at which time it will be worth $60,000. The computer will replace two office employees whose combined annual salaries are $86,000. The machine will also immediately lower the firm’s required net working capital by $75,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 25 percent. The appropriate discount rate is 8 percent. Calculate the NPV of this project. show work step by step

Answer 1

Tax rate		25%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Total
Cost		$           345,000	$          345,000	$           345,000	$           345,000	$           345,000
Dep Rate		20.00%	20.00%	20.00%	20.00%	20.00%
Depreciation		$             69,000	$             69,000	$             69,000	$             69,000	$             69,000	$           345,000
Calculation of after-tax salvage value
Cost of machine			$          345,000
Depreciation			$          345,000
WDV			$                     -
Sale price			$             60,000
Profit/(Loss)			$             60,000
Tax			$             15,000
Sale price after-tax			$             45,000
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5
Labor cost saving		$             86,000	$            86,000	$             86,000	$             86,000	$             86,000
Less: Depreciation		$             69,000	$             69,000	$             69,000	$             69,000	$             69,000
Profit before tax		$             17,000	$            17,000	$             17,000	$             17,000	$             17,000
Tax@25%		$                4,250	$               4,250	$                4,250	$                4,250	$               4,250
Profit After Tax		$             12,750	$            12,750	$             12,750	$             12,750	$             12,750
Add Depreciation		$             69,000	$             69,000	$             69,000	$             69,000	$             69,000
Cash Profit after-tax		$             81,750	$            81,750	$             81,750	$             81,750	$             81,750
Calculation of NPV
						8.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor	Present values
0		$          (345,000)	$             75,000		$          (270,000)	1.0000	$    (270,000.00)
1				$             81,750	$             81,750	0.9259	$        75,694.44
2				$             81,750	$             81,750	0.8573	$        70,087.45
3				$             81,750	$             81,750	0.7938	$        64,895.79
4				$             81,750	$             81,750	0.7350	$        60,088.69
5		$             45,000	$           (75,000)	$             81,750	$             51,750	0.6806	$        35,220.18
					Net Present Value		$       35,986.55