Answer:
machine's cost = $200,000 + $10,000 + $30,000 = $240,000
useful life of 4 years
salvage value of $25,000, depreciable value = $215,000
MACRS 3-year asset:
- 0.333 x $215,000 = $71,595
- 0.445 x $215,000 = $95,675
- 0.148 x $215,000 = $31,820
- 0.074 x $215,000 = $15,910
incremental sales of 1,250 units per year, during 4 years:
- 1,250 x $200 = $250,000
- 1,250 x $206 = $257,500
- 1,250 x $212.18 = $265,225
- 1,250 x $218.55 = $273,188
incremental COGS of 1,250 units per year, during 4 years:
- 1,250 x $100 = $125,000
- 1,250 x $103 = $128,750
- 1,250 x $106.09 = $132,613
- 1,250 x $109.27 = $136,588
net working capital increases by 12% of sales revenue = $250,000 x 12% = $30,000
WACC = 10%
tax rate = 40%
initial investment = $240,000 (machine cost) + $30,000 (working capital) = $270,000
- net cash year 1 = [($250,000 - $125,000 - $71,595) x (1 - 40%)] + $71,595 = $103,638
- net cash year 2 = [($257,500 - $128,750 - $95,675) x (1 - 40%)] + $95,675 = $115,520
- net cash year 3 = [($265,225 - $136,588 - $31,820) x (1 - 40%)] + $31,820 = $92,295
- net cash year 4 = [($273,188 - $136,588 - $15,910) x (1 - 40%)] + $15,910 = $88,324 + $25,000 (salvage value) + $30,000 (net working capital) = $143,324
to calculate the present value:
PV = $103,638/1.1 + $115,520/1.1² + $92,295/1.1³ + $143,324/1.1⁴ = $94,216 + $95,471 + $69,343 + $97,892 = $356,922
NPV = $356,922 - $270,000 = $86,922
