Question

please answer with excel ONLY + formulas used

DDD is debating the purchase of a new digital scanner. The scanner they acquired 3 years ago for $500,000 is worth $150,000 today and will have a salvage value of $45,000 after 7 more years. The current scanner generates revenues of $300,000 per year. The costs of operating the scanner are $180,000 per year. The company currently has $50,000 invested in operating net working capital. The new scanner will cost $760,000. The new scanner will generate revenues of $485,000 per year. In addition, the costs of operating the new scanner will be $195,000. The new scanner will allow the company to immediately reduce its investment in operating networking capital to $20,000. At the end of 7 years, the new machine will have a salvage value of $140,000. The company's corporate tax rate is 30%, the CCA rate is 20% and the required rate of return is 8%. Assume the asset class open. Using net present value (NPV) calculation, determine if the company should purchase the new scanner. Show all work. Most importantly, you need to determine the incremental cash flows. Note: All of Calculations should be rounded to the nearest dollar.

Answer 1

Evaluation of purchase option New Scanner 1 Present Value of Increamental cash outflow Particulars Purchase price of new scanner Less: Resale Value of Old Scanner Present Value of Increamental Cash Outflow Amount 760000 150000 610000

Ition Donroc. 2 Present Value of Increamental cash Inflow Net Cash Net Cash Incremental Incremental Deprecia Tax Shield on Net Cash Flow Discounting Present Inflow Inflow After revenue Cost Depreciation After tax Factor @ 8% value Before Tax Tax 4=2-3 5=4*(1-0.3) 7=6*30% 8=5+7 10=8*9 30000 30000 30000 122000 36600 66600 1.0000 66600 185000 15000 170000 119000 97600 29280 148280 0.9259 137296.3 185000 15000 170000 119000 78080 23424 142424 0.8573 122105.6 185000 15000 170000 119000 62464 18739.2 137739.2 0.7938 109341.8| 185000 15000 170000 119000 49971.2 14991.36 133991.36 0.7350 98487.65 185000 15000 170000 119000 39976.96 11993.088 130993.088 0.6806 89151.69 185000 15000 170000 119000 31981.57 9594.4704 128594.4704 0.630281036.33 325000 15000 310000 217000 25585.25 7675.57632 224675.5763| 0.5835 131096 Total Present Value of Cash Inflow 835115.5 NPV = Present Value of cash Inflow - Present Value of Cash Outflow NPV = 835115.5 - 610000 NPV = 225115.5 Since, Increamental NPV is positive company should buy new scanner

Notes:- 1 Increamental revenue in 0 year of 30000 is release of working capital. Hence, It is not taxable 2 Increamental revenue From 1 to 7 years = Revenue from old Scanner-revenue from new scanner 3 Increamental Cost From 1 to 7 years = Operating cost of old Scanner-Operating cost of new scanner 4 Calculation of Depreciation Depreciation (1 st year) = 610000*20% Depreciation (2nd year onwards) = WDV*20% Or Depreciation (2nd year onwards) = Previous years depreciation *80% 5 Increamental revenue of 7th Year also includes salvage Value of scanner at the end of 7th year i.e. 140000