Homework Answers
| a.Initial Investment Outlay = Base Price + Modification cost + Increase in Working Capital | |||
| =-290,000-72500-15000 | |||
| (377,500) | since outflow | ||
| b.Annual Cash Flows: | |||
| Year 1 | 2 | 3 | |
| Savings in Cost | 59,000 | 59,000 | 59,000 |
| Less: Depreciation | 119,625 | 163,125 | 54,375 |
| Net Savings | -60,625 | -104,125 | 4,625 |
| Less: Tax @40% | -24,250.00 | -41,650.00 | 1,850.00 |
| Income after Tax | -36,375.00 | -62,475.00 | 2,775.00 |
| Add: Depreciation | 119,625 | 163,125 | 54,375 |
| Operating Cash Flow | 83,250.00 | 100,650.00 | 57,150.00 |
| Add: After tax salvage value | 88,450.00 | ||
| Recovery of Working capital | 15,000 | ||
| Additional cash flows | 103,450 | ||
| Annual Cash Flow | 83,250.00 | 100,650.00 | 160,600.00 |
| Written down value | 25,375 | ||
| Sale price | 130500 | ||
| Gain on sale | 105,125 | ||
| Tax | 42050 | ||
| After tax salvage value | 88450 | ||
| c.NPV = Present value of cash inflows – present value of cash outflows | |||
| = 83250*PVF(11%, 1 year) + 100650*PVF(11%, 2 years) + 160600*PVF(11%, 3 years) – 377500 | |||
| -103380.8663 | |||
| No, should not be purchased (since NPV is negative) |
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