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 $9,000 and sell its old washer for $2,200. The new washer will last for 6 years and save $2,700 a year in expenses. The opportunity cost of capital is 19%, 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 $

Explanation / Answer

a & b)

c)

Time line 0 1 2 3 4 5 6 Cost of new machine -9000 +Proceeds from sale of old machine =selling price* ( 1 -tax rate) 1320 =Initial Investment outlay -7680 Savings 2700 2700 2700 2700 2700 2700 -Depreciation Cost of machine/6 -1500 -1500 -1500 -1500 -1500 -1500 =Pretax cash flows 1200 1200 1200 1200 1200 1200 -taxes =(Pretax cash flows)*(1-tax) 720 720 720 720 720 720 +Depreciation 1500 1500 1500 1500 1500 1500 =after tax operating cash flow 2220 2220 2220 2220 2220 2220 reversal of working capital 0 +Proceeds from sales after tax 0 "=Terminal year after tax cash flows 0 Total Cash flow for the period -7680 2220 2220 2220 2220 2220 2220 Required rate of return= 19% Discount factor= (1+ required rate)^N 1 1.19 1.4161 1.685159 2.005339 2.386354 2.839761 Discounted cash flow= total cash flow/discount factor -7680 1865.546218 1567.686 1317.383 1107.045 930.2896 781.756 NPV= Sum of discounted cash flow = -110.294575

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