Question

15 Bottoms Up Diaper Service is considering the purchase of a new Industrial washer. It can purchase the washer for $4,800 and sell its old washer for $1,200. The new washer will last for 6 years and save $1,400 a year in expenses. The opportunity cost of capital is 18%, and the firm's tax rate is 21%. points a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project In years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be Indicated by a minus sign.) b. What is project NPV? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) c. What Is NPV If the firm Investment is entitled to Immediate 100% bonus depreciation? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) Annual operating cash flow in year 0 Annual operating cash flow in years 1 to 6 NPV NPV

Answer 1

Part a:

Please refer to the analysis below:

Cost of capital Tax Rate (T) 18% 21% S No year Initial Investments New Washer cost Proceeds from sale of old washer After tax cash inflows from sale of old machine (=1200*(1-T)) Net initial investment -4800 1200 948 -3852 1106 Operating Cash flows After tax Savings from new washer (=1400*(1-21%)) Depriciation on new washer (=cost/6) Tax savings on depriciation (Depr*T) Net Operating Cash flow (5+7) 800 168 1274 1106 800 168 1274 1106 800 168 1274 1106 800 168 1274 1106 800 168 1274 1106 800 168 1274 Net Cash Flow (4+8) Present value factor (1/(1+18%)^year) PV of cash flows (=Cash flow * PV factor) -3852 1274 1 0.8475 -3852 1079.661 1274 1274 0.7182 0.6086 914.967 775.3957 1274 1274 1274 0.5158 0.4371 0.3704 657.115 556.8771 471.9298 NPV (=Sum of PV of cash flows) 603.95

As shown in row 8,

Operating Cash flow in year 0= 0

Operating Cash flow in year 1 to 6 = 1274

Part b: NPV (as calculated above) = $603.95

Part c:

Under 100% immediate bonus depreciation, the depreciation equal to cost is take in the first year of project life. So the cash flows & the corresponding NPV will be as shown below:

S No 1 year Initial Investments New Washer cost Proceeds from sale of old washer After tax cash inflows from sale of old machine (=1200*(1-T)) Net initial investment -4800 1200 948 -3852 1106 1106 1106 1106 1106 1106 Operating Cash flows After tax Savings from new washer (=1400*(1-21%)) 100% bonus Depriciation on new washer (taken in 1st year) Tax savings on depriciation (Depr* T) Net Operating Cash flow (5+7) 4800 1008 2114 0 0 1106 0 1106 0 1106 0 1106 -3852 Net Cash Flow (4+8) Present value factor (=1/(1+18%) ^year) PV of cash flows (=Cash flow * PV factor) 2114 0.8475 1791.53 1106 0.7182 794.31 1106 0.6086 673.15 1106 0.5158 570.46 1106 0.4371 483.44 1106 0.3704 409.70 -3852 NPV (=Sum of PV of cash flows) 870.59

NPV= $ 870.59