RightPrice Investors, Inc., is considering the purchase of a $372,000 computer w

Question

RightPrice Investors, Inc., is considering the purchase of a $372,000 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 $72,000 in four years. The computer will replace 4 office employees whose combined annual salaries are $117,000. The machine will also immediately lower the firm’s required net working capital by $92,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 34 percent. The appropriate discount rate is 12 percent. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Year

0

1

2

3

4

Employees’ salaries

-

$117,000.00

$117,000.00

$117,000.00

$117,000.00

Depreciation

-

$93,000.00

$93,000.00

$93,000.00

$93,000.00

Salvage value

-

$-

$-

$-

$72,000.00

Inflow before taxes

-

$24,000.00

$24,000.00

$24,000.00

$96,000.00

Tax @ 34%

-

$8,160.00

$8,160.00

$8,160.00

$32,640.00

Net Profit after taxes

-

$15,840.00

$15,840.00

$15,840.00

$63,360.00

Depreciation

-

$93,000.00

$93,000.00

$93,000.00

$93,000.00

Changes in Working Capital

$92,000.00

$-

$-

$-

$-92,000.00

Cash Flow after taxes

$92,000.00

$108,840.00

$108,840.00

$108,840.00

$64,360.00

Initial Investment

$-372,000.00

$-

$-

$-

$-

Discounting Factor @ 12%

                 1.00

$      0.89286

$      0.79719

$      0.71178

$0.63552

NPV

$-280,000.00

$   97,178.57

$   86,766.58

$   77,470.16

$40,901.94

Project NPV

$ $22,317.26

Year

0

1

2

3

4

Employees’ salaries

-

$117,000.00

$117,000.00

$117,000.00

$117,000.00

Depreciation

-

$93,000.00

$93,000.00

$93,000.00

$93,000.00

Salvage value

-

$-

$-

$-

$72,000.00

Inflow before taxes

-

$24,000.00

$24,000.00

$24,000.00

$96,000.00

Tax @ 34%

-

$8,160.00

$8,160.00

$8,160.00

$32,640.00

Net Profit after taxes

-

$15,840.00

$15,840.00

$15,840.00

$63,360.00

Depreciation

-

$93,000.00

$93,000.00

$93,000.00

$93,000.00

Changes in Working Capital

$92,000.00

$-

$-

$-

$-92,000.00

Cash Flow after taxes

$92,000.00

$108,840.00

$108,840.00

$108,840.00

$64,360.00

Initial Investment

$-372,000.00

$-

$-

$-

$-

Discounting Factor @ 12%

                 1.00

$      0.89286

$      0.79719

$      0.71178

$0.63552

NPV

$-280,000.00

$   97,178.57

$   86,766.58

$   77,470.16

$40,901.94

Project NPV

$ $22,317.26

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