Homework Answers
| Time line | 0 | 1 | 2 | 3 | |||
| Cost of new machine | -144000 | ||||||
| Initial working capital | -15000 | ||||||
| =a. Initial Investment outlay | -159000 | ||||||
| 3 years MACR rate | 33.00% | 45.00% | 15.00% | 7.00% | |||
| Savings | 59000 | 59000 | 59000 | ||||
| -Depreciation | =Cost of machine*MACR% | -47520 | -64800 | -21600 | 10080 | =Salvage Value | |
| =Pretax cash flows | 11480 | -5800 | 37400 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | 6888 | -3480 | 22440 | |||
| +Depreciation | 47520 | 64800 | 21600 | ||||
| =b. after tax operating cash flow | 54408 | 61320 | 44040 | ||||
| reversal of working capital | 15000 | ||||||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 28800 | |||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 4032 | |||||
| =Terminal year after tax cash flows | 47832 | ||||||
| Total Cash flow for the period | -159000 | 54408 | 61320 | 91872 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | ||
| Discounted CF= | Cashflow/discount factor | -159000 | 49461.81818 | 50677.68595 | 69024.79339 | ||
| c. NPV= | Sum of discounted CF= | 10164.30 | |||||
Accept as NPV is positive
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