Question

The management of Kimco is evaluating replacing their large mainframe computer with a modern network system that requires much less office space. The network would cost $505,090.00 (including installation costs) and due to efficiency gains, would generate $120,165.00 per year in operating cash flows (accounting for taxes and depreciation) over the next five years. The old mainframe has a remaining book value of $49,204.00 and would be immediately donated to a charity for the tax benefit. Kimco’s cost of capital is 8.00% and the tax rate is 39.00%. What is the NPV for this project?

Answer 1

rate positively ..

	Cost of new machine	$      505,090.00
Less:	Tax shield on old machine	$       (19,189.56)
	49,204*39%
	Total	$      485,900.44
	Therefore initial outflow =		$ (485,900.44)
	Computation of NPV
	Year	0	1	2	3	4	5
	Investment	$     (485,900.44)
	Operating cash flow		120,165	120,165	120,165	120,165	120,165
	Total cash flow	$     (485,900.44)	$   120,165.00	$   120,165.00	$   120,165.00	$   120,165.00	$   120,165.00
	PVIF @ 8%	1	0.925925926	0.85733882	0.793832241	0.735029853	0.680583197
	Present value	$     (485,900.44)	$   111,263.89	$   103,022.12	$     95,390.85	$     88,324.86	$     81,782.28	$(6,116.44)
	NPV =	$         (6,116.44)