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Capital Budegting) Your task is to analyze a cost cutting project, where a new and more...

Capital Budegting) Your task is to analyze a cost cutting project, where a new and more efficient machinery is installed. You have the following data: • Acquisition cost of new machinery: 200000 • Additional working capital investment: 20,000 (recovered at the end of project) • Annual (Before tax) cash savings from the improved efficiency: 50,000 • Lifespan of new machinery: 5 years • Corporate marginal tax rate : 35% • Depreciation : straight line to zero book value • Market value of machinery in 5 yrs:40,000 • Cost of capital 12% Compute the cost of NPV of this cost cutting project and argue if company should invest in this project?

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Answer #1

NPV of installation of new machinary is calculated in excel and screen shot provided below:

B14 X fNPV (12%,C12:G12)+B12 Year 2 initial Investment 3 Investment in working capotal 4 MACRS Depreciation rate 0 ($200,000)

NPV ofproject is -$26,276.27. Since, NPV of project is a negative value, so company should not make investment in installation of new machinary.

Formula for excel calculation is shown below for reference:

B14 X-/ j -NPV(1296,C12612)+812 1 Year 2 initial Investment 3 Investment in working capota 4 MACRS Depreciation rate 5 Annual

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