Scott Investors, Inc., is considering the purchase of a $400,000 computer with a

Question

Scott Investors, Inc., is considering the purchase of a $400,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $78,000 in five years. The computer will replace 5 office employees whose combined annual salaries are $123,000. The machine will also immediately lower the firm’s required net working capital by $98,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 38 percent. The appropriate discount rate is 12 percent.

What is the NPV???

Explanation / Answer

Year Particulars Income/Expense Dep Tax Cashflow PV Factor PV of Cash Flows 0 Investment -400000 1 -400000 1 Working Capital 98000 0.892857 87500 1 Depreciation & saving 123000 80000 16340 106660 0.892857 95232.14286 2 Depreciation & saving 123000 80000 16340 106660 0.797194 85028.69898 3 Depreciation & saving 123000 80000 16340 106660 0.71178 75918.48123 4 Depreciation & saving 123000 80000 16340 106660 0.635518 67784.35824 5 Depreciation & saving 123000 80000 16340 106660 0.567427 60521.74843 5 Working Capital -98000 0.567427 -55607.83186 5 Sale of asset 78000 24960 53040 0.567427 30096.32043 NPV                      46,474

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