Question

18. Thornley Machines is considering a 3-year project with an initial cost of $400,000. The project will not directly produce any sales but will reduce operating costs by $175,000 a year before taxes. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $100,000. The tax rate is 35 percent. The project will require $60,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a 12 percent rate of return? Why or why not? no; The NPV is -$31,999. no; The NPV is -$28,441. no; The NPV is -$14,706. yes; The NPV is $14,266. yes; The NPV is $31,559. А. В. С. D. E.

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Answer 1

E D 26 Initial Cost 27 Benefit 28 sale 29 Tax 30 Depreciation 400000 175000 100000 0.35 =+E26/3 Year Outflow Benefit After Tax Tax saving on Depreciation Sale Value After Tax Total Benefit PVF @ 12% Present Value -400000 35 0 36 1 37 2 38 3 =175000*(1-E29) =+F36 =+F37 =+E30*E29 =+E30*E29 =+E30*E29 =+E35+F35+G35+H35 =+E36+F36+G36+H36 =+E37+F37+G37+H37 =+E38+F38+G38+H38 =+J35/1.12 =+J36/1.12 =+J37/1.12 NPV =+135*J35 =+136*136 =+137*137 =+138*138 =SUM(K35:K38) =100000*(1-E29) 40

Year	Outflow	Benefit After Tax	Tax saving on Depreciation	Sale Value After Tax	Total Benefit	PVF @ 12%	Present Value
0	-400000	-	-	0	-4,00,000	1.00	-4,00,000.00
1		113750	46,667	0	1,60,417	0.89	1,43,229.17
2		113750	46,667	0	1,60,417	0.80	1,27,883.18
3		113750	46,667	65000	2,25,417	0.71	1,60,447.13
						NPV	31,559.48

Ans : E i,e project should be implemented since the NPV is positive. ( $ 31,559.48)