ACME Manufacturing is considering replacing an existing production line with a n

Question

ACME Manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labor than the existing line. The new line would cost $1 million, have a five-year life, and be depreciated using MACRS over three years. At the end of five years, the new line could be sold as scrap for $2,840,000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in a savings of $77,000 per year before tax and unadjusted for inflation (in today's dollars). Additional sales with the new machine are expected to result in additional net cash inflows, before tax, of $119,000 per year (in today’s dollars). If ACME invests in the new line, a one-time investment of $10,000 in additional working capital will be required. The tax rate is 35 percent, the opportunity cost of capital is 10 percent, and the annual rate of inflation is 2.80 percent. What is the NPV of the new production line? (Round intermediate calculations and final answer to the nearest whole dollar, e.g. 5,275. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Explanation / Answer

Year 0 1 2 3 4 5 NPV Initial Outflow             -10,00,000 Residual Value      28,40,000 Tax on Residual Value       -9,94,000 Additioanl working Capitas                   -10,000            10,000 Total Capital Inflow/(Outflow)             -10,10,000                       -                         -                         -                     -        18,56,000 33.33% 44.45% 14.81% 7.41% Depreciation         -3,33,300        -4,44,500        -1,48,100        -74,100                      -   Annual Saving              77,000              77,000              77,000          77,000            77,000 EBT         -2,56,300        -3,67,500            -71,100            2,900            77,000 Tax at 35%            -89,705        -1,28,625            -24,885            1,015            26,950 PAT         -1,66,595        -2,38,875            -46,215            1,885            50,050 Depn          3,33,300          4,44,500          1,48,100          74,100                      -   ATCF          1,66,705          2,05,625          1,01,885          75,985            50,050 FCF             -10,10,000          1,66,705          2,05,625          1,01,885          75,985      19,06,050 Inflation rate=1/(1+.028)^n 1 0.972762646 0.946267165 0.920493351 0.89542155 0.871032634 Real Value             -10,10,000          1,62,164          1,94,576              93,784          68,039      16,60,232 Dis factor=1/(1+.1)^n 1 0.909090909 0.826446281 0.751314801 0.68301346 0.620921323 Dis. Real cash Flow             -10,10,000          1,47,422          1,60,807              70,462          46,471      10,30,873 4,46,035

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.