Market Top Investors, Inc., is considering the purchase of a $485,000 computer with an economic life of six years. The computer will be fully depreciated over six years using the straight-line method, at which time it will be worth $132,000. The computer will replace two office employees whose combined annual salaries are $98,000. The machine will also immediately lower the firm’s required net working capital by $87,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 22 percent. The appropriate discount rate is 8 percent. |
Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Is it worthwhile to buy the computer? |
Initial investment: | ||||
Investment in computer | -485000 | |||
less: Reduction in working capital | 87000 | |||
Net initial investment | -398000 | |||
terminal value at the end of 6 years | ||||
Investment required in WC | -87000 | |||
After tax salvage value | ||||
Sale value of computer | 132000 | |||
less: tax @ 22% | 29040 | 102960 | ||
Terminal cashflows | 15960 | |||
Annual Cashflows | ||||
Annual savings in labour cost | 98000 | |||
Less: Annual depreciation | 80833 | |||
(485000 /6 ) | ||||
Net savings | 17167 | |||
Less: tax @ 22% | 3777 | |||
After tax savings | 13390 | |||
Add: Depreciation | 80833 | |||
Annual cashflows | 94223 | |||
Net present value | ||||
Annual cashflows | 94223 | |||
Annuity PVF at 8% for 6 years | 4.62288 | |||
Present value of Cashflows | 435581.6 | |||
Present value of Terminal value | 10057.51 | |||
(15960*0.63017) | ||||
Present value of inflows | 445639.1 | |||
Less: Net initial investment | -398000 | |||
Net present value | 47639 | |||
hence, the project must be accepted | ||||
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