A manufacturer is evaluating a standard project that requires an investment in m

Question

A manufacturer is evaluating a standard project that requires an investment in machinery today for $100 million. This new machine will last for ten years, and will be depreciated straight-line to a value of zero at the end of year ten. The extra savings from the new machine are expected to produce project inflows of $25 million per year, beginning one year from today, for ten consecutive years. The machine does carry extra costs such that project outflows will be $10 million per year, beginning one year from today, for ten consecutive years. If the firm’s tax rate is 25% and the required rate of return is 20%, which of the following comes closest to the NPV of the new equipment project?

A. ($42 million)

B. ($21 million)

C. $0

D. $21 million

E. $42 million

Explanation / Answer

NPV is looking to -42 Mn

0 1 2 3 4 5 6 7 8 9 10 Initial Investment -100 Savings 25 25 25 25 25 25 25 25 25 25 Outflows 10 10 10 10 10 10 10 10 10 10 Depreciation 10 10 10 10 10 10 10 10 10 10 PBT 5 5 5 5 5 5 5 5 5 5 Tax 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 PAT 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 Cashflows -100 13.75 13.75 13.75 13.75 13.75 13.75 13.75 13.75 13.75 13.75 NPV -35.29

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