Question

12-33 Granny's Butter and Eigg Business is such that she pays an effective tax rate of 25%. Granny is considering the purchase of a new Turbo Churn for $25.000. This churn is a special handling device for food manufacture and has an estimated life of and a salvage value of $5000. The new expected to increase net income by $8000 4 years churn is per year for each of the 4 years of use. If Granny works with an after-tax MARR of 10% and uses 3-year MACRS depreciation, should she buy the churn?

Answer 1

Yes, Since NPV is positive at $1781.97

Workings

OCF		MACRS 3 year
Year	Cash flows	Depreciation	EBIT	Tax	PAT	OCF
1	8000	-8332.5	-332.5	83.125	-249.375	8083
2	8000	-11112.5	-3112.5	778.13	-2334.375	8778
3	8000	-3702.5	4297.5	-1074.4	3223.125	6926
4	8000	-1852.5	6147.5	-1536.9	4610.625	6463

AutoSave © of HO- Book1 - Excel Sign in - o X File Home Insert Draw Page Layout Formulas Data Review View Help O Tell me what you want to do Share Comments Calibri = = det - 8 - À À = - A - E ab - General $ - % Insert Delete - Format 2' AZ O T- - Sort & Find & Filter - Select Paste BI U - Conditional Format as Formatting Table Cell Styles Clipboard Font Alignment Number Styles Cells Editing D2 Initial cash flow I B C D | E F G | Year Salvage AWN- Initial cash flow LOCE --B2 Working capital =-B5 А INPUTS Initial cost Tax rate Selling price 5 Working capital MARR 7 Annual cash flow =117 25000 0.25 5000 0 0.1 8000 Net cash flows =SUM(D3:43) =SUM(D4:G4) =SUM(D5:45) =SUM(D6:66) =SUM(D7:47) 2 =118 3 =119 4 =120 =5000*(1-25%) 600 11 12 NPV =NPV(B6, H4:H10)+H3 13 EBIT 14 15 Year 16 1 17 2 18 3 19 4 20 5 21 6 22 Depreciation rate OCF 0.3333 Year 0.4445 0.1481 0.0741 3 1 MACRS 3 year Depreciation =$D$3*B16 =$D$3*B17 =$D$3*B18 =$D$3*B19 Cash flows =$B$7 =$B$7 =$B$ 7 =$B$ 7 12 =SUM(D17:E17) =SUM(D18:E18) =SUM(D19:E19) =SUM(D20:E20) Tax =-F17*$B$3 =-F18*$B$3 --F19*$B$3 =-F20*$B$3 PAT =F17+617 =F18+G18 =F19+619 =F20+G20 OCE =H17-E17 =H18-E18 =H19-E19 =H20-E20 14 23

Year	Initial cash flow	OCF	Working capital	Salvage	Net cash flows
0	-25000		0		-25000
1		$8,083.13			8083.125
2		$8,778.13			8778.125
3		$6,925.63			6925.625
4		$6,463.13		3750	10213.125
				NPV	$1,781.97