Your company is considering a machine that will cost $50,000 at Time 0 and that

Question

Your company is considering a machine that will cost $50,000 at Time 0 and that can be sold after 3 years for $10,000. $12,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered when the operation is closed at the end of Year 3. The facility will produce sales revenues of $50,000 per year will be incurred. Operating cash inflows will begin 1 year from today (at t = 1). By an act of Congress, the machine will have depreciation expenses of $40,000, $5,000, and $5,000 in Year 1, 2, and 3, respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative, and a 15 percent cost of capital. Inflation is zero. What are the project's NPV and IRR?

Explanation / Answer

cost of machine 50000 working capital investment 12000 total capital outflow 62000 Year sales variable cost contribution depreciation income after dep tax income after tax dep income after tax before depreciation present value @15% present value of cash flow 1 50000 20000 30000 40000 -10000 0 -10000 40000 30000 0.869565 26086.96 2 50000 20000 30000 5000 25000 10000 15000 5000 20000 0.756144 15122.87 3 50000 20000 50000 5000 45000 18000 27000 5000 32000 0.657516 21040.52 3 22000 0.657516 14465.36 present value of cash flow 76715.71 cash outflow 62000 NPV 14715.71 income after tax before depreciation present value @15% present value of cash flow 30000 0.769231 23076.92 20000 0.591716 11834.32 32000 0.493097 15779.09 22000 0.493097 10848.13 present value of cash flow 61538.46 cash outflow 62000 NPV -461.538 IRR lower rate + (lower rate NPV / lower rate NPV - higher rate NPV)*difference in rate lower rate lower rate NPV / lower rate NPV - higher rate NPV difference in rate IRR 29.54385 15 0.96959 15 IRR is 29.54%

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