Question

XYZ Company is considering the purchase of a new machine. The machine will cost $200,000 and is expected to last ten years. However, the machine will need maintenance costing $25,000 at the end of year three and at the end of year seven. In addition, purchasing this machine would require an immediate investment of $30,000 in working capital which would be released for investment elsewhere -at the end of the 10 years. The machine is expected to have a $14,000 salvage value at the end of ten years. The machine will be used to generate net, cash inflows of $50,000 per year in each of the 10 years. XYZ Company has a cost of capital of 9% and an income tax rate of 40%. For tax purposes, the machine would be classified in the MACRS 5-year class life and will be depreciated using the optional straight-line method. Calculate the net present value (NPV) of this machine. If your answer is negative, place a minus sign in front of your answer with no spaces in between (e.g., -1234).

Answer 1

Solutions ! NPV = PV of cash inflow a pu of cash outflow step i cain of from year 30,000 Present value of cash inflow I tog cash flow =$50,000 each yeu. in 10th year = cash in flow= $ 50000 Add Salvage vahu = 14000 Add Released of working Capital 10th year Carsh inflow 94000 PV of cash inflow (1+2+3) $ 50,000 PUAH (81.99 + $ 9400 PvIf (9.4., 10) $ 50,000 X 5.9953 + $. guwo X. 4225 =$339 480 = [email protected] 200 or Step2 pu of cash out flow year Kash out flow o mic cost $ 200.000 Working $ 30,000 3 25000 (maintene] ㅋ 25000 (mantun) 20000 19305 (25000X •7722) 13650 (25000x-5460) $ 262955 NPV = $ 339480 - $262955 =$76,525