Question

T-Shirt By Design is considering the purchase of a new printing press to be used over the next three years. The press has a base price of $900,000. The machine has a fi ve year useful life and the firm plans to depreciate the machine using straight line depreciation over the useful life. The press would require an increase in working capital (mainly t-shirts) of $16,000. The press is expected to save the firm 400,000 in before tax operating costs each year and T-Shirt By Design's tax rate and WACC are 35% and 12%, respectively. If T-Shirt By Design plans to sell the machine at the end of the project (i.e. end of year three), at what price must they sell the machine to make them willing to pursue the project? That is, what is the break-even sale price of the equipment?  

Answer 1

	0	1	2	3	4	5	5
Cash Outflow on account of machine purchase	-900000
Cash Outflow on account of Working Capital Inc	-16000
Post TaxCash Inflow of Savings (4 Lacs *(1-35%)		260000	260000	260000	260000	260000
tax savings because of Dep- (900000/5*35%)		63000	63000	63000	63000	63000
Selling Price received for Sale (Pre/Post Tax)							X
Working Capitl receive back						16000
Net Value	-916000	323000	323000	323000	323000	339000	X
Dis Factor @ 12%	1	0.892857	0.797194	0.71178	0.635518	0.567427	0.567427
PV	-916000	288392.9	257493.6	229905	205272.3	192357.7	0.5674X

As present vaue before itself is Rs 2.57 Lacs, they can sell at any value (Even 0) and make money,