Question

Suppose you are considering purchasing a $7,500 machine that will increase sales by $2,000 per year over a 4-year period. At the end of the 4 year period, the machine will have a salvage value of 0. The asset will be depreciated to 0 using straight line method. If the appropriate tax rate of 32%, and a required return of 9%, what is the NPV of the project?

I already know the answer (-$1150.15) I would like to know how to solve the problem.

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

Answer 3 Firstly we have to calculate the inflow for each from purchase of machine UP I Amount 2000 1875 Statement of Cash Inflow 5 Particular 7 Sales 3 Less Pepreciation (7500/4) Net Profit Before Tax LO Tax (125*32%) -1 Net Profit After Tax _2 Add depreciation expense 3 Cash Inflow from machine per year 1875 1960 5 Now we can calculate the Net Present Value of Machine 7 NPV = Present value of cash inflow from all years-present value of cash outflows 8 = (1960*((1-(1+i)^-n)/i)) - 7500 9 = (1960*((1-(1+.09)^-4)/.09)) - 7500 0 = 6349.85 - 7500 1 = $ 1150.15 3 Thus the correct answer NPV = $1150.15