XYZ (same company) is now evaluating the purchase of a new machine for $210,000

Question

XYZ (same company) is now evaluating the purchase of a new machine for $210,000 installed with no NWC change. They plan to sell the machine at the end of 3 years for $40,000. MACRS 3 year depreciation. With the more efficient machine, labor savings per year are expected to be $70,000, $94,000 and $76,000 respectively. 40% tax. The cost of capital for this project is 8.2%

5. What is the discounted payback for this project?

3.2 years

2.94 years

2.52 years

2.99 years

6. If the cost of capital for this project is determined to be equal to their WACC (reference question #5), what is the NPV now?

1271.63

6054.33

1,150

(1054.64)

7. What is the IRR?

8%

9.33%

8.57%

8.31%

Explanation / Answer

Purchase price of the machine = $210,000 Salvage value = $40,000 Labour savings for three years = $70,000, $94,000 and $76,000 Tax 40% Depreciation 3 years MACRS: Year Rate Depreciation on machine 1 33.33% $69,993.00 2 44.45% $93,345.00 3 14.81% $31,101.00 4 7.41% $15,561.00 Year 0 1 2 3 4 Cast of machine ($210,000) Salvage value $40,000 Savings $70,000 $94,000 $76,000 Depreciation ($69,993.00) ($93,345.00) ($31,101.00) ($15,561.00) Net operating cash flow before tax ($210,000) $7.00 $655.00 $44,899.00 $24,439.00 Tax $2.80 $262.00 $17,959.60 $9,775.60 After tax profit $4.20 $393.00 $26,939.40 $14,663.40 Cash flow ($210,000) $69,997.20 $93,738.00 $58,040.40 $30,224.40 Cost of capital = 8.20% Answer-5 Years Cash Flows Present value os cash flows Cumulative cash flow 0 ($210,000) ($210,000) 1 $69,997.20 $64,692.42 $64,692.42 2 $93,738.00 $80,068.40 $144,760.82 3 $58,040.40 $45,819.32 $190,580.14 4 $30,224.40 $22,052.03 $212,632.17 Cash to be recovered = $210,000 Cash of $190580.14 is recovered in 3 years Remaining amount to be recovered = $210,000 -$190,580.14 = $19,420 Now, $212,632.17 is recovered in = 12 months $19420 will be recovered in = 1.0959692 months So Discounted payback period = 3 years and 1.0959 months Answer-6 Years Cash Flows 0 ($210,000) 1 $69,997.20 2 $93,738.00 3 $58,040.40 4 $30,224.40 NPV at a discount rate of 8.2% = $2,632.17 Answer-7 Years Cash Flows 0 ($210,000) 1 $69,997.20 2 $93,738.00 3 $58,040.40 4 $30,224.40 IRR of the project = 8.84%

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