a.III.Sunk cost, not included | |||
a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital | |||
=-195000-17000-8500 | |||
(220,500) | since outflow | ||
b.Annual Cash Flows: | |||
Year 1 | 2 | 3 | |
Savings in Cost | 54,000 | 54,000 | 54,000 |
Less: Depreciation | 69,960 | 95,400 | 31,800 |
Net Savings | -15,960 | -41,400 | 22,200 |
Less: Tax @35% | -5,586.00 | -14,490.00 | 7,770.00 |
Income after Tax | -10,374.00 | -26,910.00 | 14,430.00 |
Add: Depreciation | 69,960 | 95,400 | 31,800 |
Operating Cash Flow | 59,586.00 | 68,490.00 | 46,230.00 |
Add: After tax salvage value | 62,231.50 | ||
Recovery of Working capital | 8,500 | ||
Additional cash flows | 70,732 | ||
Annual Cash Flow | 59,586.00 | 68,490.00 | 116,961.50 |
Written down value | 14,840 | ||
Sale price | 87750 | ||
Gain on sale | 72,910 | ||
Tax | 25518.5 | ||
After tax salvage value | 62231.5 | ||
c.NPV = Present value of cash inflows – present value of cash outflows | |||
= 59586*PVF(14%, 1 year) + 68,490*PVF(14%, 2 years) + 116,961.50*PVF(14%, 3 years) – 220500 | |||
-36585.06693 | |||
No, should not be purchased (since NPV is negative) |
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