Market Top Investors, Inc., is considering the purchase of a $335,000 computer with an economic life of four years. The computer will be fully depreciated over four years using the straight-line method, at which time it will be worth $90,000. The computer will replace two office employees whose combined annual salaries are $91,000. The machine will also immediately lower the firm’s required net working capital by $80,000. 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 9 percent. |
Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Time line | 0 | 1 | 2 | 3 | 4 | |||
Cost of new machine | -335000 | |||||||
Initial working capital | -80000 | |||||||
=Initial Investment outlay | -415000 | |||||||
100.00% | ||||||||
Savings | 91000 | 91000 | 91000 | 91000 | ||||
-Depreciation | Cost of equipment/no. of years | -83750 | -83750 | -83750 | -83750 | 0 | =Salvage Value | |
=Pretax cash flows | 7250 | 7250 | 7250 | 7250 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | 5437.5 | 5437.5 | 5437.5 | 5437.5 | |||
+Depreciation | 83750 | 83750 | 83750 | 83750 | ||||
=after tax operating cash flow | 89187.50 | 89187.50 | 89187.5 | 89187.5 | ||||
reversal of working capital | 80000 | |||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 67500 | ||||||
+Tax shield on salvage book value | =Salvage value * tax rate | 0 | ||||||
=Terminal year after tax cash flows | 147500 | |||||||
Total Cash flow for the period | -415000 | 89187.50 | 89187.50 | 89187.500 | 236687.5 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.09 | 1.1881 | 1.295029 | 1.4115816 | ||
Discounted CF= | Cashflow/discount factor | -415000 | 81823.3945 | 75067.3344 | 68869.11413 | 167675.39 | ||
NPV= | Sum of discounted CF= | -21564.76 |
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