Bottoms Up Diaper Service is considering the purchase of a new industrial washer

Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $3,300 and sell its old washer for $900. The new washer will last for 6 years and save $700 a year in expenses. The opportunity cost of capital is 11%, and the firm’s tax rate is 40%.

a.

If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated.

  Annual operating cash flow

$

b.

What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

  NPV

$

  

c.

What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  NPV

$

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $3,300 and sell its old washer for $900. The new washer will last for 6 years and save $700 a year in expenses. The opportunity cost of capital is 11%, and the firm’s tax rate is 40%.

Explanation / Answer

Answer:a Calculation of the Annual operating cash flow:

Saving in expenses=700

Less: Dep=550

Net saving=150

Less: Taxes=60

Net saving after tax=90

Add: Dep=550

Annual operating cash flow=640

Answer:b

Answer:c

Tax rate= 40% Opportunity cost of capital = 11% Year 0 1 2 3 4 5 6 Purchase new washer     3,300.00 Sell the old washer         900.00 Net investment (2,400.00) Expenses saving       700.00       700.00       700.00       700.00       700.00       700.00 Depreciation       550.00       550.00       550.00       550.00       550.00       550.00 Net expense saving       150.00       150.00       150.00       150.00       150.00       150.00 After tax saving          90.00          90.00          90.00          90.00          90.00          90.00 Net present value = (2,019.25) Equivalent annual cost =         428.52

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