Question

Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 15,200 dollars. It would be depreciated straight-line to 1,000 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,000 dollars. The system is expected to reduce costs by 4,400 dollars in year 1 and by 12,600 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 7.37 percent, what is the net present value of the new purification system project?

Answer 1

			YEar1	YEar2
Savings in ccost			4400	12600
Less: Depreciation			7100	7100
Before Tax Incme			-2700	5500
Less: Tax @ 50%			1350	2750
After Tax iNcome			-1350	2750
Add: Dep			7100	7100
Annual cashflows			5750	9850
PVF at 7.37%			0.931359	0.867429
Present value of CF			5355.313	8544.179	13899.49
Prsent value of salvage					1734.858
(2000*0.867429)
Present Value of Inflows					15634.35
Less: Initial investment					15200
NPV					434.35