Question

Amazon is looking at a new vending system with an installed cost of $625,000.  This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the vending system can be scrapped for $95,000.  The vending system will save the company $183,000 per year in pre-tax operating costs, and the system requires an initial investment in net working capital of $41,000.  The tax rate is 34% and the discount rate is 8%.

What is the NPV?

What is the IRR?

What is the Payback?

Should the company invest? Why?

Answer 1

What is the NPV?

Year (t)	Value of Asset	Depreciation (straight line)D: asset/5	Salvage value	Net Working Capital (NWC)	Saving per year	Before Tax cash Flow (BTCF) = ( saving + Salvage value)	Taxable Income = (BTCF - depreciation)	Income taxes = (Taxable Income *34%)	After tax cash flow (ATCF) = (BTCF - Income tax)	PV of after tax cash flow @8%= ATCF/ (1+8%)^t
0	$625,000	N/A		$41,000			0	0	-$666,000	-$666,000.00
1		$125,000			$183,000	$183,000	$58,000	$19,720	$163,280	$151,185.19
2		$125,000			$183,000	$183,000	$58,000	$19,720	$163,280	$139,986.28
3		$125,000			$183,000	$183,000	$58,000	$19,720	$163,280	$129,616.93
4		$125,000			$183,000	$183,000	$58,000	$19,720	$163,280	$120,015.67
5		$125,000	$95,000		$183,000	$278,000	$153,000	$52,020	$225,980	$153,798.19
NPV (sum of PVs)										$28,602.26

What is the IRR?

Year (t)	After tax cash flow (ATCF) = (BTCF - Income tax)
0	-$666,000
1	$163,280
2	$163,280
3	$163,280
4	$163,280
5	$225,980
IRR	9.54%

What is the Payback?

Year (n)	Cash flow from project (CF)	Cumulative cash flow
0	-$666,000	-$666,000
1	$163,280	-$502,720
2	$163,280	-$339,440
3	$163,280	-$176,160
4	$163,280	-$12,880
5	$225,980	$213,100
Payback Period for project =	4.06	(In Years)
Payback Period (period where cumulative cash flow is zero) = X + (Y/Z)
Where,
X = Last period with a negative cumulative cash flow;
Y = Absolute value of cumulative cash flow at the end of the period X;
Z = cash flow during the period after X.

Should the company invest? Why?

Company should invest in this project because it has positive NPV, IRR is more than its discount rate and payback period is also less than 5 years

Formulas used in excel calculation:

A В C Е F G Н К After tax |Tаxable Before Tax cash cash flow Income taxes (ATCF) Income Flow (BTCF) ( Depreciation (straight line)D: asset/5 N/A =$B$2/ 5 =$B$2/5 -$B$2/5 =$B$2/5 -$B$2/5 PV of after tax (ВТCF - Net Working Salvage value Capital (NWC) cash flow @8%= Income *34%) Income tax) ATCF/ (1+8%)^t |J2/ ( 1+8 % )^A2 J3/ (1+8% ) ^A3 J4 / ( 1+8%)^A4 J5/(1+8% )^ A5 |=J6/(1+8%)^A6 |J7/ ( 1+8% )^A7 |=SUM(K2:K7) (ВТCF- saving+Salvage depreciati= (Taxable 1 Year (t) Value of Asset 625000 on) 0 Saving per year value) -B2-E2 -G3-13 -G4-14 41000 2 0 |Ен3*0.34 |ЕН4*0.34 -F3 G3- C3 3 1 183000 183000 -F4 - F5 4 2 -G4-C4 EG5-C5 -G5-15 -G6-16 H5*0.34 5 3 183000 |ЕН6*0,34 183000 -F6 6 4 -G6-C6 -H7*0.34 -G7-17 95000 -F7+D7 -G7-C7 183000 7 5 8 NPV (sum of PVs) 9 After tax cash flow (ATCF)= (BTCF-Income 10 Year (t) tax) 11 0 -666000 163280 12 1 163280 13 2 14 3 163280 15 4 163280 225980 16 5 =IRR(B11: B16) 17 IRR

C A В 18 Cash flow from project (CF) |-666000 163280 163280 Cumulative cash flow 19 Year (n) 20 0 B20 -B21+C20 21 1 -B22+C21 22 2 163280 163280 225980 -B23+C22 23 3 -B24+C23 24 4 -B25+C24 25 5 26 Payback Period for pro A24+(-C24/B25) (In Years) 27