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).
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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