Question

A new electronic process monitor costs $980,000. This cost could be depreciated at 30 percent per year (Class 10). The monitor would actually be worth $100,000 in five years. The new monitor would save $ 450,000 per year before taxes and operating costs. The new monitor requires to increase net working capital by $47,200 when we buy it. Assume a tax rate of 40 percent. If we require a 15 percent return, what is the NPV of the purchase?

Answer 1

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1 2 e . * 9 w x v * 5 09:24 ENG 31-03-2020 23 X cz49 _ CQ CR STEP 1 V fix CS CT CU CV CALCULATION OF PRESENT VALUE OF TAX SHIELD CW cx CY CZ DA DB DC C= COST OF EQUIPMENT d = DEPRECIATION RATE Tc = TAX RATE S-SALVAGE VALUE r =DISCOUNT RATE 980000 30% 40% 100000 15% PVCCATS = care 0.5) - Tanator r+d 1+1 d PVCCATS =(( 980000*0.30*0.40)/(0.15 +0.30))*((1+0.5*0.15)/(1+0.15)) - ((100000*0.30*0.40)/(0.30 +0.15)*(1/((1+0.15)^5))) PVCCATS = 231031.81 STEP 2 PRESENT VALUE OF ALL CASH FLOWS = 450000*(1-0.40) X PVIFA @15%, 5 YEARS + ( WORKING CAPITAL + SALVAGE VALUE) X PVIF @15%, 5 YEARS 270000 X 3.3521551 + (100000 + 47200) X 0.4971767 978266.29 STEP 3 INTIAL CASH OUTFLOW COST OF MACHINE + WORKING CAPITAL 980000 + 47200 1027200 NOTE PVIFA@15%, 5 YEARS PVIF @15%, 5 YEARS 3.3521551 0.4971767 STEP 4 NPV = STEP 1+ STEP 2 -STEP 3 NPV = STEP 1+ STEP 2 -STEP 3 231031.81 +978266.29 - 1027200 182098.10 50 RATIO PI PBP ARR invest, EAA REPLACEMENTS IRRnpvbeta HPR GMAM EAC MACRS RELEVANT Mi-np-ir NPV BETA LEVERED REPLACEMENT BONC ... ►