Question

Rally is interested in some equipment. The equipment will generate net income of $6000 per year...

Rally is interested in some equipment. The equipment will generate net income of $6000 per year for the next 5 years. The equipment costs $20,000 with no salvage value. The equipment will be fully depreciated to a zero book value on a straight line basis over 5 years. The firm's cost capital is 10%. Find the net present value (NPV).

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Answer #1

Calculation of the depreciation per year :-

Depreciation = Cost of machine / life of machne in years = 20,000 / 5 = $ 4000 per year

Calculation of the operating free cash flows:-

Let us assume here given netincome is after tax income

Operating freecash flows = Net income + depreciation = 6000 + 4000 = $ 10,000 per year.

Calculation of the present value of cash inflows :-

Year Cash inflows PVF@10% Present value of CF
1 10000 0.909091 9090.90909
2 10000 0.826446 8264.46281
3 10000 0.751315 7513.14801
4 10000 0.683013 6830.13455
5 10000 0.620921 6209.21323
Present value of cash inflows $ 37,907.87

NPV = Present value of cash inflows - initial investment = $ 37,907.87 - 20,000 = $ 17,907.87

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