Question

Please explain each step thoroughly

Redden-Bensimon Avionics Corp is considering the purchase of a new machine which will reduce manufacturing and operating costs by $5,000 annually and increase revenues by $6,000 annually. Depreciation and taxes are excluded. Finance.com will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes. The 5-year MACRS depreciation rates are 20%, 32%, 19%, 12%, 12%, and 5%. Finance.com's marginal tax rate is 35 percent, and uses a 12 percent cost of capital to evaluate projects of this type. (a) If the machine's cost is $40,000 (including set up costs), what is the project's NPV? There are no other relevant cash flows. (b).What is the terminal (or non-operating) cash flow for the project?

Answer 1

Statement showing NPV

Particulars	0	1	2	3	4	5	NPV
Capital investment	-40000
Savings in manufacturing and operating costs		5000	5000	5000	5000	5000
Increase in revenue		6000	6000	6000	6000	6000
Depreciation		8000	12800	7680	4608	4608
PBT		3000	-1800	3320	6392	6392
Tax @ 35%		1050		1162	2237	2237
PAT		1950	-1800	2158	4155	4155
Add: depreciation		8000	12800	7680	4608	4608
Annual Cash flow		9950	11000	9838	8763	8763
Salvage value(10000 - 35%(10000-2304)) =10000-2693.6						7306
Total cash flow	-40000	9950.0	11000.0	9838.0	8762.8	16069.2
PVIF @ 12%	1	0.8929	0.7972	0.7118	0.6355	0.5674
Present value	-40000	8884	8769	7002	5569	9118	-657

Terminal cash flow = 7306