Scott Investors, Inc., is considering the purchase of a $370,000 computer with a

Question

Scott Investors, Inc., is considering the purchase of a $370,000 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 $70,000 in four years. The computer will replace 4 office employees whose combined annual salaries are $115,000. The machine will also immediately lower the firm’s required net working capital by $90,000. 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 10 percent.

Calculate the NPV of this project. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Scott Investors, Inc., is considering the purchase of a $370,000 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 $70,000 in four years. The computer will replace 4 office employees whose combined annual salaries are $115,000. The machine will also immediately lower the firm’s required net working capital by $90,000. 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 10 percent.

Explanation / Answer

Particulars Year Cash Flow PVF PV Initial Investment 0 370000 1 370000 Working Capital 4 90000 0.683 61470 Present Value of Cash Outflows 431470 Tax Saving on Depreciation 1 to 4 37000 3.1699        1,17,286 Savings in operating cost ( net of tax) 1 to 4 69000 3.1699        2,18,723 Working Capital 0 90000 1            90,000 Fixed asset scraped 4 42000 0.683            28,686 Present value of cash inflows        4,54,695 Net Present Value            23,225

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