Please show all work for me to understand. JJ Enterprises is considering the pur

Question

Please show all work for me to understand.

JJ Enterprises is considering the purchase of a new machine that will produce thumb drives. The new machine will require an initial investment of $100,000 and has an economic life of five years and will be fully depreciated by the straight line method. The machine will produce 15,000 thumb drives per year with each costing $2.00 to make. Each will be sold at $4.50. Assume JJ Enterprises uses a discount rate of 14 percent and has a tax rate of 34 percent. What is the NPV of the project and should JJ Enterprises make the purchase.

Please show all work for me to understand.

Explanation / Answer

Initial Investment (Year 0)= $100,000

For Years 1 to 5,

Revenue = 15000 * 4.5 = $67,500

Cost of Goods Sold = 15000 * 2 = $30,000

Gross profit = Revenue - Cost of Goods Sold = 67500 - 30000 = $37,500

Depreciation = (Initial Value - Scrap Value) / Economic Life = (100000 - 0) /5 = $20,000

Profit Before Tax = Gross Profit - Depreciation = 37500 - 20000 = $17,500

Profit after Tax = Profit Before Tax * ( 1 - Tax rate) = 17500 * ( 1 - 0.34) = 17500 * 0.66 = $11,550

Since Depreciation is a non-cash expense,

Cash Flow = Profit After Tax + Depreciation = 11550 + 20000 = $31,550

Tabulating the figures,

                  Cash Flow Table

Net Present Vaue of the Project = -100000 + 31550 / 1.14 + 31550 / 1.142 + 31550 / 1.143 + 31550 / 1.144 + 31550 / 1.145 = -100000 + 27675.44 + 24276.70 + 21295.35 + 18680.13 + 16386.08 = $8,313.70

Since Net Present Value of the Project is greater than 0, JJ Enterprises should make the purchase as it is creating wealth for the company.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment -100000 Revene 67500 67500 67500 67500 67500 COGS 30000 30000 30000 30000 30000 Gross Profit 37500 37500 37500 37500 37500 Depreciation 20000 20000 20000 20000 20000 Profit Before Tax 17500 17500 17500 17500 17500 Profit After Tax 11550 11550 11550 11550 11550 Cash Flow 31550 31550 31550 31550 31550

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