Thornley Machines is considering a 3-Year Project with an initial cost of $618,0

Question

Thornley Machines is considering a 3-Year Project with an initial cost of $618,000. The project will not directly produce an sales but will reduce operating costs by $265,000 a year. The equipment is depreciated strait-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 $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a 9% rate of return? Why or why not? PLEASE SHOW ALL WORK!!!

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Cash Outlay = 618000 + 23000 = 641000

Annual Cash Flows = 265000 - (618000)/3 = 59000*(1-.34) = 38940 + (618000)/3 = 244940

NPV = -641000 + 244940/(1+.09)^1 + 244940/(1+.09)^2 + 244940/(1+.09)^3 + 60000*(1-.34)/(1+.09)^3 + 23000/(1+.09)^3 = 27354

Answer is 27354. Yes the project should be implemented as it offers a + NPV.

Thanks.

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