Scott Investors, Inc., is considering the purchase of a $362,000 computer with a

Question

Scott Investors, Inc., is considering the purchase of a $362,000 computer with an economic life of four years. The computer will be fully depreciated over four years using the straight-line method. The market value of the computer will be $62,000 in four years. The computer will replace 4 office employees whose combined annual salaries are $107,000. The machine will also immediately lower the firm’s required net working capital by $82,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 34 percent. The appropriate discount rate is 10 percent.

  

Calculate the NPV of this project. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Answer: $11,027.20

Purchase price 362000 Less: Solvage Value after 4 year 62000 Net Depreciable value 300000 Life of the computer 4 year Annual depreciation(300000/4) 75000 Annual Salary Savings 107000 Less: Depreciation 75000 Net Savings 32000 Less: Tax @34% 10880 Earnings after Tax 21120 Add back Depreciation 75000 Net annual cashinflows 96120 Initial Cash for purchase 362000 Less: Working capital withdraw 82000 Initial cash outflows 280000 Annual Cash inflows 96120 Add: Solvage Value 62000 Less: Working Capital Replacement -82000 Net cashinflow in year 4 76120

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