Lugar Industries is considering an investment in a new machine with the followin
ID: 2653764 • Letter: L
Question
Lugar Industries is considering an investment in a new machine with the following information:
Machine cost 225,000
Setup cost 25,000
Salvage value 50,000
Life 5 years
Net operating expense savings:
End of Year 1 $ 50,000
End of Year 2 $ 90,000
End of Year 3 $110,000
End of Year 4 $120,000
End of Year 5 $120,000
WACC 10%
Tax rate 40%
Assumed value of the machine
at end of 5 years is $50,000
If Lugar buys the machine, calculate the following answers. Remember to include the impact of depreciation, taxes, and salvage value.
Calculate the NPV. You need to take into account depreciation, taxes and salvage value into account when calculating this problem. Round you answer to the nearest whole number. Do not use $, commas, or decimal
Explanation / Answer
Answer:-=[50000 * (1 - .40) + 40000] = 70000
Investment = 225000 + 25000
= 250000
Scrap = 50000
Year = 5 year
Tax rate = 40%
WACC = 10%
Depreciation = (250000 - 50000) / 5
= 40000
NPV = Present Value - Investment
= 397978 - 250000
= 147978
Year FCF (free cash flow) = [Net operating expenses saving * (1 - tax rate) + Depreciation + Scrap] PVIF at 10% Present Value 1 =[50000 * (1 - .40) + 40000] = 70000 .909 63630 2 =[90000 * (1 - .40) + 40000] = 94000 .826 77644 3 =[110000 * (1 - .40) + 40000] = 106000 .751 79606 4 =[120000 * (1 - .40) + 40000] = 112000 .683 76496 5 =[120000 * (1 - .40) + 40000 + 50000] = 162000 .621 100602 TOTAL 397978Related Questions
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