Question

Renegade Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2.89 million and will last for six years. Variable costs are 34% of sales, and fixed costs are $2084143 per year. Machine B costs $5.13 million and will last for nine years. Variable costs for this machine are 23% of sales and fixed costs are $1324234 per year. The sales for each machine will be $10.7 million per year. The required return is 9 %, and the tax rate is 38%. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the NPV for machine A. (Round answer to 2 decimal places. Do not round intermediate calculations)

Answer 1

Sales revenue per year = $ 10,700,000

Variable cost = $ 10,700,000 x 0.34 = $ 3,638,000

Depreciation expense per year = $ 2,890,000/6 = $ 481,666.67

Computation of Cash flow:

Sales Revenue	$ 10,700,000.00
Less: Variable cost	$    3,638,000.00
Less: Fixed cost	$    2,084,143.00
Operating Income	$    4,977,857.00
Less: Depreciation	$        481,666.67
EBT	$    4,496,190.33
Less: Tax @ 38 %	$    1,708,552.33
Net Income	$    2,787,638.01
Add: Depreciation	$    3,269,304.67
Annual cash flow	$    6,056,942.68

Computation of NPV:

Machine A
Year	Cash Flow	Calculation of PV Factor	PV Factor @ 9 %	PV
0	$          (2,890,000)	1/(1.09)^0	1	$         (2,890,000)
1	$      6,056,942.68	1/(1.09)^1	0.917431193	$     5,556,828.15
2	$      6,056,942.68	1/(1.09)^2	0.841679993	$     5,098,007.47
3	$      6,056,942.68	1/(1.09)^3	0.77218348	$     4,677,071.08
4	$      6,056,942.68	1/(1.09)^4	0.708425211	$     4,290,890.90
5	$      6,056,942.68	1/(1.09)^5	0.649931386	$     3,936,597.15
6	$      6,056,942.68	1/(1.09)^6	0.596267327	$     3,611,557.02
			NPV	$   24,280,951.77