Answer:
a) -$1,129,000
b) net operating cash flows:
year 1 = $412,239
year 2 = $448,152
year 3 = $350,428
c) total year 3 cash flow (including after tax salvage value and working capital) = $831,759
after tax salvage value = $464,831
working capital = $16,500
d) NPV = $179,733
e) the machine should be purchased
Explanation:
initial investment year 0 = $1,090,000 + $22,500 + $16,500 (net working capital) $1,129,000
depreciation per year:
year 1 = 33.33% x $1,112,500 = $370,796
year 2 = 44.45% x $1,112,500 = $490,506
year 3 = 14.81%% x $1,112,500 = $164,761, carrying value after depreciation = $86,437
if sold at $627,000 at the end of year 3, the after tax net cash flow = $627,000 - [($627,000 - $86,437) x 30%] = $464,831
cash flow year 1 = [($430,000 - $370,796) x (1 - 30%)] + $370,796 = $412,239
cash flow year 2 = [($430,000 - $490,506) x (1 - 30%)] + $490,506 = $448,152
operating cash flow year 3 = [($430,000 - $164,761) x (1 - 30%)] + $164,761 = $350,428
total cash flow year 3 = [($430,000 - $164,761) x (1 - 30%)] + $164,761 + $16,500 + $464,831 = $831,759
NPV = $179,733
