Question

XYZ corp. is considering investing in a new machine. The new machine cost will $10,000 installed. Depreciation expense will be $1000 per year for the next five years. At the end of the fifth year XYZ expects to sell the machine for $6000. XYZ will also sell its old machine today that has a book value of $3000 for $3000. The old machine has depreciation expense of $600 per year. Additionally, XYZ Corp expects that the new machine will increase its EBIT by $2000 in each of the next five years. Assuming that XYZ’s tax rate is 21% and the new machines WACC is 15%, what is the projects NPV. Round your final answer to two decimals.

Answer 1

Time line		0	1	2	3	4	5
Proceeds from sale of existing asset	=selling price* ( 1 -tax rate)	2370
Tax shield on existing asset book value	=Book value * tax rate	630
Cost of new machine		-10000
=Initial Investment outlay		-7000
								100.00%
Profits			3000	3000	3000	3000	3000
-Depreciation	(Cost of equipment-salvage value)/no. of years		-1000	-1000	-1000	-1000	-1000	5000	=Salvage Value
=Pretax cash flows			2000	2000	2000	2000	2000
-taxes	=(Pretax cash flows)*(1-tax)		1580	1580	1580	1580	1580
+Depreciation			1000	1000	1000	1000	1000
=after tax operating cash flow			2580	2580	2580	2580	2580
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						4740
+Tax shield on salvage book value	=Salvage value * tax rate						1050
=Terminal year after tax cash flows							5790
Total Cash flow for the period		-7000	2580	2580	2580	2580	8370
Discount factor=	(1+discount rate)^corresponding period	1	1.15	1.3225	1.520875	1.7490063	2.0113572
Discounted CF=	Cashflow/discount factor	-7000	2243.478261	1950.850662	1696.39188	1475.1234	4161.3693
NPV=	Sum of discounted CF=	4527.21