Question

Market Top Investors, Inc., is considering the purchase of a $345,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method, at which time it will be worth $78,000. The computer will replace two office employees whose combined annual salaries are $89,000. The machine will also immediately lower the firm’s required net working capital by $78,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 23 percent. The appropriate discount rate is 11 percent.

  

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-345000
Initial working capital		78000
=Initial Investment outlay		-267000
Savings			89000	89000	89000	89000	89000
-Depreciation	Cost of equipment/no. of years		-69000	-69000	-69000	-69000	-69000
=Pretax cash flows			20000	20000	20000	20000	20000
-taxes	=(Pretax cash flows)*(1-tax)		15400	15400	15400	15400	15400
+Depreciation			69000	69000	69000	69000	69000
=after tax operating cash flow			84400	84400	84400	84400	84400
reversal of working capital							-78000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						60060
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							-17940
Total Cash flow for the period		-267000	84400	84400	84400	84400	66460
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704	1.6850582
Discounted CF=	Cashflow/discount factor	-267000	76036.03604	68500.933	61712.553	55596.894	39440.775
NPV=	Sum of discounted CF=	34287.19