Riverview Company is evaluating the proposed acquisition of a new production mac

Question

Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 2 years. At the end of the second year, the machine will be sold for $100,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the NPV of the project?

Explanation / Answer

Year 0 1 2 Savings in Cost (A) $0.00 $110,000.00 $110,000.00 Depreciation (B) $0.00 $76,000.00 $76,000.00 Total Savings (C = A+B) $0.00 $186,000.00 $186,000.00 Less: Tax at 34% (D) $0.00 $63,240.00 $63,240.00 Post tax cash inflow (E = C-D) $0.00 $122,760.00 $122,760.00 Net Working Capital (F) -$10,000.00 $0.00 $10,000.00 Machine Cost including Installation (G) -$228,000.00 $0.00 $0.00 Post Tax Salvage Value of Machine (H) $0.00 $0.00 $91,840.00 Net Cash inflow (I = E + F+G+H) -$238,000.00 $122,760.00 $224,600.00 PV Factor at 12% (J) 1.0000 0.8929 0.7972 Present value at 12% (I*J) -$238,000.00 $109,607.14 $179,049.74 NPV (Total) $50,656.89 Depreciation Calculation Cost of Machine $200,000.00 Installation Cost $28,000.00 Total machine Cost (a) $228,000.00 No of year (b) 3 Depreciation per year (a/b) $76,000.00 Post tax salvage value of machine Cost of Machine 228000 Less: Depreciation for two years $152,000.00 Book Value (a) $76,000.00 Sale Proceeds (b) $100,000.00 Profit (c = b-a) $24,000.00 Tax on above at 34% (d) $8,160.00 Post tax cash flow from sale of machine (b-d) $91,840.00

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.