Question

a company is considering purchasing new safety equipment. The equipment costs $1,750,000. The equipment is going to be depreciated using straight-line to zero in 3 years. additional revenues for the equipment are $1,350,000 and the annual expenses are $400,000. After three years the company will sell the safety equipment for $140,000. The intial investment in working capital is $200,000 and the 35 percent tax bracket and requires an 18% return on projects.

What is the NPV of the project?

also for the next question the equipment will be depreciated using the three year MACRS schedule. please answer both!

Answer 1

D52 - x fix =-K51/3 A B C D E F G H I J K L M N Depreciati Net Depreciati After-tax | Working Net cash PVIF@ 50 Year Revenue Costs on PBT Tax@35% income on OCF | capital Investment flow 18% Present value 51 0 $(200,000) $(1,750,000) $(1,950,000)| 1.000 $ (1,950,000) 52. 1 $1,350,000 $ 400,000 $ 583,333$ 366,667 $ 128,333 $ 238,333 $583,333 $ 821,667 $ - $ 821,667 0.847 $ 696,328 2 $1,350,000 $ 400,000 $ 583,333 $ 366,667 $ 128,333 $ 238,333 $583,333 $ 821,667 $ $ 821,667 0.718 $ 590,108 3 $1,350,000 $ 400,000 $ 583,333 $ 366,667 $ 128,333 $ 238,333 $583,333 $ 821,667 $ 200,000 $ 91,000 $ 1,112,667 0.609 $ 677,203 Net present value $ 13,639 $1,750,000 $1,750,000 Asset cost Less: Depreciation charged WDV at the time of sale Sale value of machine Profit/(Loss) on sale Less: Tax @ 35% After tax cash salvage value $ $ $ $ 140,000 140,000 49,000 91,000 67 68

with MACRS:

K on D52 : X V fx =1750000*0.3333 2 A B C D E F G H I J L M N Depreciati Net Depreciati After-tax Working Net cash PVIF@ 50 Year Revenue Costs PBT Tax@35% income on OCF capital Investment flow 18% Present value 51 o $(200,000) $(1,750,000) $(1,950,000)| 1.000$ (1,950,000)| 1 $1,350,000 $400,000 $ 583,275 $ 366,725 $ 128,354 $ 238,371 $583,275 $ 821,646 $ - $ 821,646 0.847 $ 696,310 53 2 $1,350,000 $ 400,000 $ 777,875 $ 172,125 $ 60,244 $ 111,881 $777,875 $ 889,756 $ $ 889,756 0.718 $ 639,009 54 3 $1,350,000 $ 400,000 $ 259,175 $ 690,825 $ 241,789 $ 449,036 $259,175 $ 708,211 / $ 200,000 $ 136,386 $ 1,044,598 | 0.609 $ 635,774 55 521 Net present value $ 21,094 Asset cost Less: Depreciation charged WDV at the time of sale Sale value of machine Profit/(Loss) on sale Less: Tax @ 35% After tax cash salvage value $1,750,000 $1,620,325 $ 129,675 $ 140,000 $ 10,325 $ 3,614 $ 136,386 66 67 68

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