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BY HAND Heron Corporation is planning to add manufacturing capacity by installing new high-tech machines. The...

BY HAND

Heron Corporation is planning to add manufacturing capacity by installing new high-tech machines. The machines would increase revenues by $180,000 per year and increase costs by $50,000 per year. The new machines cost $560,000 and would be depreciated over 5 years using simplified straight line. Investment in net working capital of $30,000 would be required at the time of installation. The firm is planning to keep the machines for 7 years and then sell them for $80,000. The firm has a required rate of return on investment projects of 13% and a tax rate of 21%. What is the net present value of this project?

a) ($146,055) d) ($26,209)
b) ($13,457) e) ($18,015)
c) ($53,073)

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Answer #1
Year0 YEar1 YEar2 YEar3 Year4 YEar5 YEar6 YEar7
Initial Investment -560000
Investment in WC -30000
After tax net revenue 102700 102700 102700 102700 102700 102700 102700
(180000-50000)*79%
After tax dep shield 23520 23520 23520 23520 23520
(560000/5)*21%
After tax Salvage 63200
(80000-21%)
Release in WC 30000
Cashflows -590000 126220 126220 126220 126220 126220 102700 195900
PVF at 13% 1 0.884956 0.7831467 0.69305 0.6133187 0.54276 0.480319 0.425061
Present value -590000 111699.1 98848.774 87476.79 77413.09 68507.16 49328.71 83269.38
NPV -13457
Answer is b. ($13457)
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