Question

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3.09 million and will last for six years. Variable costs are 31% of sales, and fixed costs are $2,070,670 per year. Machine B costs $5.01 million and will last for nine years. Variable costs for this machine are 22% of sales and fixed costs are $1,320,674 per year. The sales for each machine will be $10.4 million per year. The required return is 11 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for machine A. (Round answer to 2 decimal places. Do not round intermediate calculations)

Answer 1

Time line		0	1	2	3	4	5	6
Cost of new machine		-3090000
=Initial Investment outlay		-3090000
									100.00%
Sales			10400000	10400000	10400000	10400000	10400000	10400000
Profits	Sales-variable cost		7176000	7176000	7176000	7176000	7176000	7176000
Fixed cost			-2070670	-2070670	-2070670	-2070670	-2070670	-2070670
-Depreciation	Cost of equipment/no. of years		-515000	-515000	-515000	-515000	-515000	-515000	0	=Salvage Value
=Pretax cash flows			4590330	4590330	4590330	4590330	4590330	4590330
-taxes	=(Pretax cash flows)*(1-tax)		2846004.6	2846004.6	2846004.6	2846004.6	2846004.6	2846004.6
+Depreciation			515000	515000	515000	515000	515000	515000
=after tax operating cash flow			3361004.60	3361004.60	3361004.6	3361004.6	3361004.6	3361004.6
+Tax shield on salvage book value	=Salvage value * tax rate							0
=Terminal year after tax cash flows								0
Total Cash flow for the period		-3090000	3361004.6	3361004.6	3361004.6	3361004.6	3361004.6	3361004.6
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704	1.6850582	1.8704146
Discounted CF=	Cashflow/discount factor	-3090000	3027932.1	2727866.7	2457537.6	2213997.8	1994592.6	1796930.3
NPV=	Sum of discounted CF=	11128857.19