Question

A new electronic process monitor costs $990,000. This cost could be depreciated at 30% per year (Class 10). The monitor would actually be worth $100,000 in five years. The new monitor would save $460,000 per year before taxes and operating costs. Suppose the new monitor requires us to increase net working capital by $47,200 when we buy it. If we require a 15% return, what is the NPV of the purchase? Assume a tax rate of 40%. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $ 1,780,665.00

Answer 1

Step 1: Calculation of Depreciation Year Depreciation Base Depreciation % Depreciation Closing Balance | AT C D =BC E = B-C 1 990000 15% 148500 841500 2 841500 30% 252450 589050 589050 30% 176715 412335 412335 30% 123700.5 288634.5 5 288634.5 30% 86590.35 202044.15 Step 2: Calculation of After Tax Salvage Value Particulars Sale value of monitor Less: Book value of monitor Loss on sale Tax Rebate on Loss @40% Amount $100,000 ($202,044.15) ($102,044.15) $40,817.662 After Tax Salvage value of monitor = sale value + Tax rebate on loss = $100,000$40,817.66 = $140,817.66

0 1 2 | 3 4 5 Step 3: Calculation of NPV of the Purchase Particulars Initial Investment Purchase of new monitor Net working capital Net Initial investment (A) -990000 -47200 -1037200 Operating Cash Flows Saving in expenses (B) 460000 460000 460000 460000 460000 Less: Depreciation (C) 148500 252450 176715123701 86590.4 Profit Before Tax (D = B-C) 311500 207550 283285 336300 373410 Less: Tax @40% (E = D*40%) 12460083020113314 134520 149364 Profit After Tax (F = D-E) 186900 124530 169971201780 224046 Add back Depreciation (G = C) 148500 252450 176715123701 86590.4 Net Operating Cash Flows (H = F+G) 335400 376980 346686 325480 310636 Terminal Value After tax salvage value (0) 140818 Net working capital recovered (J) 47200 Net Terminal value (K = I+J) 188018 Total Cash Flows (L + A+H+K) -1037200 335400 376980 346686 325480 498654 Discount rate @15% (M) 1/(1+15%)'n n=0,1,2,3,4,5 0.86957 0.75614 0.65752 0.57175 0.49718 Discounted Cash Flows (N = L*M) -1037200 291652 285051 227952 186094247919 NPV of Purchase 201468.3 Therefore, NPV of the purchase is $201,468.32