Creighton Industries is considering the purchase of a new strapping machine, whi
ID: 2653874 • Letter: C
Question
Creighton Industries is considering the purchase of a new strapping machine, which will cost $150,000, plus an additional $10,500 to ship and install. The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method. The machine is expected to generate new sales of $45,000 per year and is expected to save $16,000 in labor and electrical expenses over the next 5-years. The machine is expected to have a salvage value of $20,000. Creighton's income tax rate is 35%. Creighton uses a 12.5% discount rate for capital budgeting purposes. What is the machine's NPV?
$29,888
$25,062
$22,153
$27,894
$29,888
$25,062
$22,153
$27,894
Explanation / Answer
Answer:
Calculation of NPV:
Year
Cash Flow (CF)
PVF (12.5%)
PV =CF*PVF
Cost of Machine
Now
$ (150,000.00)
$ 1.00
$ (150,000.00)
Shipping and Installation
Now
$ (10,500.00)
$ 1.00
$ (10,500.00)
Expected Annual Sales
$ 45,000.00
Add: Saving in labor and electrical expenses
$ 16,000.00
Less: Depreciation (150000+10500)/5
$ (32,100.00)
Profit before tax
$ 28,900.00
Less: Tax @35%
$ (10,115.00)
Profit after tax
$ 18,785.00
Add: Depreciation
$ 32,100.00
Cash flows after tax
1 to 5
$ 50,885.00
3.56057
$ 181,179.52
Salvage value (Net of tax)
5
$ 13,000.00
0.55493
$ 7,214.08
20000* (1-0.35)
Net Present value = Sum of PVs
$ 27,894
Calculation of NPV:
Year
Cash Flow (CF)
PVF (12.5%)
PV =CF*PVF
Cost of Machine
Now
$ (150,000.00)
$ 1.00
$ (150,000.00)
Shipping and Installation
Now
$ (10,500.00)
$ 1.00
$ (10,500.00)
Expected Annual Sales
$ 45,000.00
Add: Saving in labor and electrical expenses
$ 16,000.00
Less: Depreciation (150000+10500)/5
$ (32,100.00)
Profit before tax
$ 28,900.00
Less: Tax @35%
$ (10,115.00)
Profit after tax
$ 18,785.00
Add: Depreciation
$ 32,100.00
Cash flows after tax
1 to 5
$ 50,885.00
3.56057
$ 181,179.52
Salvage value (Net of tax)
5
$ 13,000.00
0.55493
$ 7,214.08
20000* (1-0.35)
Net Present value = Sum of PVs
$ 27,894
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