Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $4,500 and sell its old washer for $900. The new washer will last for 6 years and save $1,100 a year in expenses. The opportunity cost of capital is 12%, and the firm's tax rate is 21%. a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.) b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Annual operating cash flow in year o Annual operating cash flow in years 1 to 6 NPV NPV

Answer 1

A: cash flow in year zero = -the initial cost of the new washer+ after-tax proceeds from sale of the old washer.

= -4500+900*(1-21%)

= -3789

Cash flows in years 1 -6 = after tax savings in expenses+ tax shield on depreciation

=1100* (1-21%)+ 21%* 4500/6

= 1026.5

B: NPV= C0+ PV of annuity

= -3789+ 1026.5*(1-1/1.12^6)/0.12

= 431.36

C: cash flow in year zero = -the initial cost of the new washer*(1-Tax) + after-tax proceeds from sale of the old washer.

= -4500*(1-21%)+900*(1-21%)

=-2844

Cash flows in years 1 -6 = after tax savings in expenses

=1100* (1-21%)

= 869

NPV = -2844+869*(1-1/1.12^6)/0.12

= 728.81