Question

Lily’s Loving Laundry is thinking about installing a new steam press at its facility so it can add in-house pressing services to its product offerings. The new press steamer will cost $14,400. It will last for five years, be depreciated on a straight-line basis to a salvage value of $4000 but will be resold for $1,400 after five years (assume no taxes apply).

Lily estimates its demand to press shirts as: 9000, 9000, 9000, 9200, 9200 in years one through five respectively. A new steam press operator will need to be hired at $13.00 per hour and will work 40 hours per month for the year. That employee will get a raise of $0.25 per year every year starting in the second year. Shirts currently cost customers $3 for dry cleaning; and an additional charge of $1.35 will be added for pressing. Lily will also need to add a $1,500 annual insurance policy to cover any steam-related accidents.

Assume Lily pays 17% in tax on its taxable income and is looking at a five-year return period over which she would expect to earn a 10% rate of return.

What is the NPV of the project (rounded to the nearest dollar)?

A) 0 dollars
B) Negative
C) $86,766
D) None of the above

Answer 1

A C Е F G Н 1 Year 0 1 3 4 2 Cost of Machine $14,400.00 3 Annual demand 9,000 9,000 9,000 9,200 9,200 4 5 Additional income from pressing shirts 6 Less: Depreciation 7 Less: Employee Costs $12,150.00 $12, 150 .00 $12,150.00$12,420.00$12,420.00 $2,080.00 $6,720.00 $1,500.00 $2,120.00 $360.40 $1,759.60 $2,080.00 $3,839.60 $1,400.00 $2,080.00 $2,080.00 $2,080.00 $2,080.00 $6,240.00 $6,360.00 $6,600.00 $6,480.00 8 Less: Annual Insurance $1,500.00 $1,500.00 $1,500.00 $1,500.00 $2,210.00 9 Earnings before tax $2,330.00 $2,090.00 $2,240.00 $396.10 $375.70 $355.30 $380.80 10 Less: Tax@17% $1,933.90 $1,834.30 $1,734.70 $1,859.20 11 Net Income 12 Add: Depreciation 13 Cash flow from operations $2,080.00 $2,080.00 $2,080.00 $2,080.00 $4,013.90 $3,914.30 $3,814.70 $3,939.20 14 Add: Salvage value net of Tax 15 $5,239.60 16 Total Cash Flows -$14,400.00 $4,013.90 $3,914.30 $3,814.70 $3,939.20 17 18 Discount rate 10% 19 NPV (Option D) $1,294

А В C D E F G 1 Year 2 Cost of Machine 0 1 2 3 4 5 14400 9000 9000 9000 9200 3 Annual demand 9200 4 5Additional income from pressing shirts -C3*1.35 ( B2-4000)/5 -E31.35 =D3 *1.35 F3*1.35 -G3*1.35 6 Less: Depreciation 7 Less: Employee Costs 8 Less: Annual Insurance 9 Earnings before tax -E6 D6 C6 =F6 (13+0.25)*40*12(13+0.25+0.25)*40*12(13+0.25+0.25+0.25)*40*12 =13 *40 12 (13+0.25+0.25+0.25+0.25)40*12 1500 -C5-C6- C7 -C8 D5-D6-D7-D8 -C9*17% 1500 1500 1500 1500 =E5-E6-E7-E8 =F5-F6-F7-F8 G5-G6-G7-G8 -E9*17% -E9-E10 -G9"17 % -G9-G10 D917% -F9*17% 10 Less: Tax@17% =F9-F10 -D9-D10 11 Net Income C9-C10 12 Add: Depreciation 13 Cash flow from operations 14 Add: Salvage value net of Tax -E6 -G6 -C6 D6 F6 C11 +C12 =E11+ E12 -G11 +G12 =D11 +D12 =F11 + F12 1400 15 =-(B2+B3) 16 Total Cash Flows -G13+G15+ G14 =E13 +E15 =F13+ F15 -C13 +C15 -D13 +D15 17 18 Discount rate 0.1 19 NPV (Option D) NPV(B18,C16:G16)+B16 20