Question

For this question start fresh, do not carry over data from earlier questions. You are analyzing the prospects of installing cost saving machinery. You have the following information:

The machine costs $96,000. Depreciation is calculated straight line (equal amounts) over 4 years.

Every year the machine increases cash flows by an amount 34,000. (Taxes, Opportunity Cost etc. have all been accounted for in this number. There is no Net Working Capital.)

After 3 years (when the machine has only been depreciated for 3 years and therefore the book value is not zero) the machine is sold for $30,000.

This, therefore, is a 3 year project. The rate of discount is 9% The tax rate is 40%. (Hint: Here you have to consider the income due to the salvage sale of the machinery and the taxes on this sale.) What is the NPV of installing the machinery?

Answer 1

Annual cashflows for 3 yrs				34000
Annuity PVF at 9% for 3yrs				2.53129
Present value of annual cashflows for 3yrs				86063.86
Present value of After tax salvage
Sale value			30000
Less: Book value (96000*1/4)			24000
Gain on sale			6000
tax on Gain on sale @ 40%			2400
After tax salvage value (30000-2400)			27600
Multipy: PVF at 9% for 3yr			0.772183	21312.25
Total Present value of inflows				107376.1
Less: Initial Investment				-96000
Net present value				11376.11