Question

Here at my school, we're contemplating a new automatic surveillance system to replace our current contract security system. It will cost $450,000 to get the new system, the cost will be depreciated straight-line to zero over the system's four year expected life. The system is expected to be worth $250,000 at the end of 4 years. We think the new system will save us $125,000 (before taxes) per year in contract security costs. The tax rate is 34%, the required rate of return is 17%.

What is the NPV (Net Present Value) for buying the new system? Show EBIT, OCF, CS, and Project Cash Flow for each year of the project's life.

Answer 1

Annual cashflows
Savings in cost			125000
Less: Depreciation (450000/4)			112500
Before tax Income			12500
Less: tax @ 34%			4250
After Taxx Income			8250
Add: Depreciation			112500
Annual cashflows			120750
Multiply: Annuity for 4yrs			2.74324
Present value of cashflows				331246.2
Present value of after taxa salvage				88052.25
(250000-34%)0.53365
Total Inflows				419298.5
Less: Initial investmente				450000
NPV				-30701.5