Nathan Co. is considering replacing its production line used for corn? dogs-in-a
ID: 1172480 • Letter: N
Question
Nathan Co. is considering replacing its production line used for corn? dogs-in-a-cup. The production line will generate? $1,300,000 in additional revenue per year for each of the next six years. Incremental annual operating costs are projected at? 60% of sales. The new production line equipment will cost? $1,500,000, and will be depreciated according to MACRS as a? five-year asset. The new fixed assets will have a market value of? $50,000 (before? taxes) at the end of six years. The existing production line is fully depreciated and can be sold as scrap for? $20,000 in? after-tax proceeds. Net working capital requirements are? $110,000 for the? six-year life of the? project; the outlay for working capital will be recovered at the end of six years. Nathan? Co.’s tax rate is? 40%, and the required rate of return is? 15%.
What is the projected NPV for the new production line? project?
Explanation / Answer
Machine A 0 1 2 3 4 5 6 Initial Investment -1,500,000 Working capital -110,000 Revneue 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 minus Operating Costs 780000 780000 780000 780000 780000 780000 Revenue * 60% Depreciation rate 20% 32% 19% 11.52% 11.52% 5.76% as per 6 yr marcs schdeule minus Depreciation 300000 480000 285000 172800 172800 86400 Depreciation = Depreciation rate * Initial investment EBIT 220,000 40,000 235,000 347,200 347,200 433,600 Taxes 88,000 16,000 94,000 138,880 138,880 173,440 Taxes = EBIT* Tax rate EAT= EBIT - Taxes 132,000 24,000 141,000 208,320 208,320 260,160 add Depreciation 300,000 480,000 285,000 172,800 172,800 86,400 add Scrap Value of Existing machine 20000 add After tax market value of new machine after 6 years 30000 add Working capital return 110,000 Total Cash Flow -1,590,000 432,000 504,000 426,000 381,120 381,120 486,560 Excel function NPV = 64594.41 Discount rate=15%
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