Question

"A manufacturing company has just received an order with the following financial data. All dollar values are given in constant dollars, and inflation will impact the annual revenue, annual operating cost, and the salvage value. The two-year project requires immediately purchasing equipment for $60,000. The equipment falls into the MACRS 5-year class. The machine will be sold for $13,000 at the end of two years. The project will bring in additional annual revenue of $85,000, but it is expected to incur an additional annual operating cost of $40,000. The firm expects a general inflation rate of 4% per year during the project period. The firm's tax rate is 38%, and its market interest rate is 22%. What is the net present worth of this project?"

Answer 1

Satement showing Net Present worth of Company:-

Years	Particulars	Cash Flow	NPV@16%	Presentvalue of cash flow
0	investment	$54000	1	($54,000)
1	Revenue-Tax	$122000*105%*59%=$75579	.8620	$65,154
2	Revenue-tax	$128100*105%*59%=$79358	.7431	$58,970
1	Additional annual cost-Tax Benefit	$45000*105%*59%=$27877	.8620	($24,030)
2	Additional annual cost-Tax Benefit	$45000*105%*105%*59%=$29271	.7431	($21,751)
2	Salvage value	$13000	.7431	$9,660
1-2	Depreciation Tax Benefit	$10800*41%=$4428	1.6051	$7107
			Netpresentworth[NPW]	$41,110

Conclusion:-

NPW is +ve Company accept the Order

Notes:-

NPW will be $37149 if we take Taxless Salvage Value(41110-9660+(13000*59%*.7431)