A manufacturer wants to introduce new factory equipment that requires machinery
ID: 2657972 • Letter: A
Question
A manufacturer wants to introduce new factory equipment that requires machinery to be purchased today for $120 million. This new machine will last for five years, and will be depreciated straight-line to a value of zero at the end of year five. The extra savings from the new machine are expected to produce project inflows of $47 million per year, beginning one year from today, for five consecutive years. The machine does carry extra costs such that project outflows will be $9 million per year, beginning one year from today, for five consecutive years. If the firm’s tax rate is 30% and the required rate of return is 12%, which of the following comes closest to the NPV of the new equipment project?
Explanation / Answer
NPV = 1,841,435.64
Year
Cash outflows
Cash inflows
Depreciation = D = 120000000/5 = 24,000,000
Net cash flow* = (Co+Ci-D)x(1-30% rate)+D
Discount factor = Df = 1/(1+12%)^Year
Present Values
Co
Ci
D
(Co+Ci-D)x(1-30% rate)+D
Df x Net Cash flows
0
-120,000,000.00
0.00
0.00
-120,000,000.00
1.000000
-120,000,000.00
1
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.892857
30,178,571.43
2
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.797194
26,945,153.06
3
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.711780
24,058,172.38
4
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.635518
21,480,511.05
5
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.567427
19,179,027.72
Total = NPV =
1,841,435.64
Year
Cash outflows
Cash inflows
Depreciation = D = 120000000/5 = 24,000,000
Net cash flow* = (Co+Ci-D)x(1-30% rate)+D
Discount factor = Df = 1/(1+12%)^Year
Present Values
Co
Ci
D
(Co+Ci-D)x(1-30% rate)+D
Df x Net Cash flows
0
-120,000,000.00
0.00
0.00
-120,000,000.00
1.000000
-120,000,000.00
1
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.892857
30,178,571.43
2
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.797194
26,945,153.06
3
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.711780
24,058,172.38
4
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.635518
21,480,511.05
5
-9,000,000.00
47,000,000.00
24,000,000.00
33,800,000.00
0.567427
19,179,027.72
Total = NPV =
1,841,435.64
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