Question

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.92 million and will last for six years. Variable costs are 35% of sales, and fixed costs are $2,013,863 per year. Machine B costs $5.09 million and will last for nine years. Variable costs for this machine are 22% of sales and fixed costs are $1,396,160 per year. The sales for each machine will be $4.4 million per year. The required return is 8 %, and the tax rate is 38%. Both machines will be depreciated to zero on a straight-line basis. Each project will require an increase in inventory of $374,905, an increase in accounts receivable of $675,615, and an increase in accounts payable of $430,119. Assume a salvage value of $721,430 for both machines.

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

Answer 1

	NPV OF MACHINE A
	YEAR	0	1	2	3	4	5	6
	COST OF MACHINE	(2,920,000.00)	-	-	-	-	-	-
	SALES	-	4,400,000.00	4,400,000.00	4,400,000.00	4,400,000.00	4,400,000.00	4,400,000.00
	VARIABLE COST	-	(1,540,000.00)	(1,540,000.00)	(1,540,000.00)	(1,540,000.00)	(1,540,000.00)	(1,540,000.00)
	DEPRECIATION	-	(486,666.67)	(486,666.67)	(486,666.67)	(486,666.67)	(486,666.67)	(486,666.67)
	FIXED COST	-	(2,013,863.00)	(2,013,863.00)	(2,013,863.00)	(2,013,863.00)	(2,013,863.00)	(2,013,863.00)
	GROSS CASH FLOW=(Sales-Expenses)	(2,920,000.00)	359,470.33	359,470.33	359,470.33	359,470.33	359,470.33	359,470.33
	TAX @ 38%	-	(136,598.73)	(136,598.73)	(136,598.73)	(136,598.73)	(136,598.73)	(136,598.73)
	NET CASH FLOW	(2,920,000.00)	222,871.61	222,871.61	222,871.61	222,871.61	222,871.61	222,871.61
	ADD:DEPRECIATION(as non cash expense)		486,666.67	486,666.67	486,666.67	486,666.67	486,666.67	486,666.67
I	CASH FLOW FROM OPERAION	(2,920,000.00)	709,538.27	709,538.27	709,538.27	709,538.27	709,538.27	709,538.27
	Profit on sale on machine							721,430.00
	Less:tax on profit							(274,143.40)
II	Net proceeds from sale of machine							447,286.60
	CASH FLOW FROM MACHINE A(I+II)	(2,920,000.00)	709,538.27	709,538.27	709,538.27	709,538.27	709,538.27	1,156,824.87
	DISCOUNT FACTOR	1.00	0.93	0.86	0.79	0.74	0.68	0.63
	DISCOUNTED CASH FLOW	(2,920,000.00)	656,979.88	608,314.71	563,254.36	521,531.81	482,899.83	728,995.90
			NPV	641,976.48