Your company is considering buying a new machine that will cost $800,000. The ma

Question

Your company is considering buying a new machine that will cost $800,000. The machine will be depreciated as a %u201C5 year asset%u201D using the MACRS schedule (see below). Due to automation features that you currently do not have, the new machine will allow your company to lower salary costs by $140,000 per year for the next five years. At the end of the five years, you expect to sell the machine for $120,000. Assume your company%u2019s cost of capital is 8%, the tax rate is 32%, and that the company has sufficient income to absorb any tax losses. Calculate the following values for the project

5 YR Depreciation Schedule

1

2

3

4

5

6

20%

32%

19.20%

11.52%

11.52%

5.76%

A) CF0         

B) CF1   

C) CF2    

D) CF3   

E) CF4                     

F) CF5

G) Net Present Value (NPV)

H) Internal Rate of Return (IRR)

5 YR Depreciation Schedule

1

2

3

4

5

6

20%

32%

19.20%

11.52%

11.52%

5.76%

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Part B:

NPV = -800000 + 146400/(1+.08)^1 + 177120/(1+.08)^2 + 144352/(1+.08)^3 + 124691.2/(1+.08)^4 + 206291.2/(1+.08)^5 = -165951.24

Part C:

IRR = -0.046 or 0%

Thanks.

Initial Outflow Annual Savings After Tax Depreciation Tax Savings Sales Value after Tax Cash Flows
CF0 -800000 0 0 0 -800000 CF1 0 95200 51200 0 146400 CF2 0 95200 81920 0 177120 CF3 0 95200 49152 0 144352 CF4 0 95200 29491.2 0 124691.2 CF5 0 95200 29491.2 81600 206291.2

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