Question

FITCO is considering the purchase of new equipment. The equipment costs $358000, and an additional $114000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $260000, and it will have annual cash operating expenses of $81000. The equipment will be sold for $83000 after 5 years. An inventory investment of $74000 is required during the life of the investment. FITCO is in the 40 percent tax bracket, and its cost of capital is 10 percent. What is the project NPV?

$47517.

$81141.

$63966.

$31755.

Answer 1

Answer is $81,141

Initial Investment = Base Price + Installation Cost
Initial Investment = $358,000 + $114,000
Initial Investment = $472,000

Useful Life = 5 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $472,000 / 5
Annual Depreciation = $94,400

Initial Investment in NWC = $74,000

Salvage Value = $83,000

After-tax Salvage Value = $83,000 * (1 - 0.40)
After-tax Salvage Value = $49,800

Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = ($260,000 - $81,000) * (1 - 0.40) + 0.40 * $94,400
Annual Operating Cash Flow = $179,000 * 0.60 + 0.40 * $94,400
Annual Operating Cash Flow = $145,160

Cost of Capital = 10%

Net Present Value = -$472,000 - $74,000 + $145,160/1.10 + $145,160/1.10^2 + $145,160/1.10^3 + $145,160/1.10^4 + $145,160/1.10^5 + $74,000/1.10^5 + $49,800/1.10^5
Net Present Value = -$546,000 + $145,160/1.10 + $145,160/1.10^2 + $145,160/1.10^3 + $145,160/1.10^4 + $268,960/1.10^5
Net Present Value = $81,141