Scott Investors, Inc., is considering the purchase of a $379,000 computer with a
ID: 2725623 • Letter: S
Question
Scott Investors, Inc., is considering the purchase of a $379,000 computer with an economic life of four years. The computer will be fully depreciated over four years using the straight-line method. The market value of the computer will be $79,000 in four years. The computer will replace 4 office employees whose combined annual salaries are $124,000. The machine will also immediately lower the firm’s required net working capital by $99,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 40 percent. The appropriate discount rate is 14 percent.
Calculate the NPV of this project.
Scott Investors, Inc., is considering the purchase of a $379,000 computer with an economic life of four years. The computer will be fully depreciated over four years using the straight-line method. The market value of the computer will be $79,000 in four years. The computer will replace 4 office employees whose combined annual salaries are $124,000. The machine will also immediately lower the firm’s required net working capital by $99,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 40 percent. The appropriate discount rate is 14 percent.
Explanation / Answer
NPV is $12349.96
Years
cost
saving of emplyee cost post tax (1-tax rate)* saving
Tax saving on depreciation
Working capital
Salvage value
Total cashflow
Dis factor @14%
Discounted cashflow
0
-379000
99000
-280000
1
-280000
1
74400
30000
104400
0.877
91,578.95
2
74400
30000
104400
0.769
80,332.41
3
74400
30000
104400
0.675
70,467.03
4
74400
30000
-99000
79000
84400
0.592
49,971.58
Total
12,349.96
Dpreciation
(379000-79000)/4
75000
Tax saving on depreciation
75000*tax rate
30000
Years
cost
saving of emplyee cost post tax (1-tax rate)* saving
Tax saving on depreciation
Working capital
Salvage value
Total cashflow
Dis factor @14%
Discounted cashflow
0
-379000
99000
-280000
1
-280000
1
74400
30000
104400
0.877
91,578.95
2
74400
30000
104400
0.769
80,332.41
3
74400
30000
104400
0.675
70,467.03
4
74400
30000
-99000
79000
84400
0.592
49,971.58
Total
12,349.96
Dpreciation
(379000-79000)/4
75000
Tax saving on depreciation
75000*tax rate
30000
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