Thornley Machines is considering a 3-year project with an initial cost of $630,0

Question

Thornley Machines is considering a 3-year project with an initial cost of $630,000. The project will not directly produce any sales but will reduce operating costs by $315,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $69,000. The tax rate is 34 percent. The project will require $15,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 11 percent? Why or why not?

Thornley Machines is considering a 3-year project with an initial cost of $630,000. The project will not directly produce any sales but will reduce operating costs by $315,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $69,000. The tax rate is 34 percent. The project will require $15,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 11 percent? Why or why not?

Explanation / Answer

answer is yes; The NPV is $81,795.85

630000 + 15000 = 645000

Annual Cash Flows = 315000 - (630000)/3 = 105000*(1-.34) = 69300 + (630000)/3 = 279300

NPV = -645000 + 279300/(1+.11)^1 + 279300/(1+.11)^2 + 279300/(1+.11)^3 + 105000*(1-.34)/(1+.11)^3 + 15000/(1+.11)^3 = $81,795.85

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