Question

1. ) You are considering bidding on a project to make new cases for mobile phones. The project details include:
   • Upfront costs of $350,000 for a new injection-moulding machine.
   • 4 year life
   • $30,000 in yearly pre-tax operating costs
   • Initial investment of $50,000 in working capital
   • Your company has a tax rate of 30%
   • 1. Complete the following table and calculate the net present value for the project costs.

   • 		Year
     Cash Flows	PV	0	1	2	3	4
     NPV

   • Your company's required rate of return is 10%
   • At the end of 4 years you can sell the equipment for $30,000
   • There is no depreciation consideration for this equipment

Answer 1

Calclation of NPV= P.V of Cash inflows- Present Value of cash outlows
					(Amt in $)
Year	Cash outlow (A)	Cash Inflow (B)	Net Cash Inflows (B-A)	PVAF @ 10%	Present value
0	350000	0	-350000	1	-350000
0 (Working capital)	50000	0	-50000	1	-50000
1	0	21000	21000	0.909	19089
2	0	21000	21000	0.826	17346
3	0	21000	21000	0.751	15771
4	0	21000	21000	0.683	14343
4 (Working Capital)	0	50000	50000	0.683	34150
4 (Salvage Value)	0	30000	30000	0.683	20490
Net Present value	-299301
Decesion: NOt to buy Machine
Savings in Operating Cost (After Tax)= $30000(1-0.30)= $21000