If the shop’s tax rate is 25 percent and its discount rate is 12 percent. Net present value is $43,334.
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Net present value</h3>
Working capital for each years
Year 0 1 2 3 4
Working capital -17,000 -4000 -4000 -4000 29,000
Working capital invested from 0-3 will be recovered in year 4.
Net present value
Year 0 1 2 3 4
Cost savings $164,000 $164,000 $164,000 $164,000
Depreciation -$87,000 -$139,200 -$83,520 -$50,112
Savings before tax $77,000 $24,800 $80,480 $113,888
Taxes 25% -$19,250 -$6,200 -$20,120 -$28,472
Net income $57,750 $18,600 $60,360 $85,416
Add: Depreciation $87,000 $139,200 $83,520 $50,112
Operating cash flow $144,750 $157,800 $143,880 $135,538
Purchase of machine -435,000
Investment in working capital-17,000 -4000 -4000 -4000 $29,000
Aftertax salvage value $67,542
Net cash flow -$452,000 $140,750 $153,800 $139,880 $232,080
Discount factor 12% 1 0.89286 0.79719 0.71178 0.63552
Present value -$452,000 $125,670 $122,608 $99,565 $147,491
Net present value $43,334
Workings:
Calculation of depreciation based on MACRS
Year
1 435000×0.20=$87,000
2 435000×0.32 =$139,200
3 435000×0.1920=$83,520
4 435000×0.1152=$50,112
Total $359,832
Calculation of aftertax salvage value
Sale proceeds $65,000
Less: Book value of machine $75,168
(435000-359,832)
Loss on sale of machine -$10,168
Tax benefit 25% $2,542
After tax salvage value $67,542
($65,000+$2,542)
Therefore the project's NPV is $43,334.
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