Question

Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 17,400 dollars. It would be depreciated straight-line to 1,400 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 2,000 dollars. The system is expected to reduce costs by 7,000 dollars in year 1 and by 13,400 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 9.51 percent, what is the net present value of the new purification system project?

Answer 1

Solution :

The net present value of the new purification system project = $ 38.69

= $ 39 ( when rounded off to the nearest whole number )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

07.11.2019 - Microsoft Excel ? 7 - INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW FILE А HOME в с F G K L (2) Statement showing calculation of Net Present value of the new purification system Project Sl.No. Year Particulars Savings in pretax Depreciation Operating Tax @ 50% Operating Addback: Cash flow after PV Factor @ Discounted operating cost 1=(17400 - 1400)/2 Income (4) = (3) * 0.50 income after Depreciation Tax 9.51 % Cash flows (1) = 8000 before tax tax (2) (6) = (5) + (2) (8) = (6) * (7) (3)=(1) - (2) (5) = (3) - (4) 1 Cash Inflow Year 1 $ 7,000.00 $ 8,000.00 $ -1,000.00 $ - 500.00 $ - 500.00 $ 8,000.00 $ 7,500.00 0.9132 $ 6,848.69 2 Cash Inflow Year 2 $ 13,400.00 $ 8,000.00 $ 5,400.00 $ 2,700.00 $ 2,700.00 $ 8,000.00 $ 10,700.00 0.8339 $ 8,922.29 2 Cash Inflow Year 2 - Salvage value $ - $ 2,000.00 $ - $ 2,000.00 0.8339 $ 1,667.72 Total of discounted cash Inflows - (A) - (1)+(2) + (3) $ 17,438.69 O Initial Investment $ 17,400.00 1.0000 $ 17,400.00 Total of Cash Outflows - (B) $ 17,400.00 Net Present value of the Project = (A) - (B) $ 38.69