Bottoms Up Diaper Service is considering the purchase of a new industrial washer
ID: 2776240 • Letter: B
Question
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $8,400 and sell its old washer for $2,400. The new washer will last for 6 years and save $2,400 a year in expenses. The opportunity cost of capital is 19%, and the firm’s tax rate is 40%.
a.) If the firm uses straight line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated.
b.) What is project NPV?
c.) What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule.
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $8,400 and sell its old washer for $2,400. The new washer will last for 6 years and save $2,400 a year in expenses. The opportunity cost of capital is 19%, and the firm’s tax rate is 40%.
Explanation / Answer
Solution ; Time line 0 1 2 3 4 5 6 Cost of new washer -8400 Proceeds of old washer selling price*( 1 -tax rate) 1440 Total investment in new machine -6960 Initial Investment outlay -6960 Savings 2400 2400 2400 2400 2400 2400 Less :Depreciation (8400/6) cost of washer/6 -1400 -1400 -1400 -1400 -1400 -1400 Pre tax operating cashflow 1000 1000 1000 1000 1000 1000 -taxes pretax cashflow*(1-tax) 600 600 600 600 600 600 +Depreciation 1400 1400 1400 1400 1400 1400 [a] after tax operating cash flow 2000 2000 2000 2000 2000 2000 Reversal of Net working capital 0 Proceeds from sale of assets selling price*(1 - tax rate) 0 +Salvage book value * tax rate 0 Terminal year non operating cash flows 0 Total Cash flow for the period -6960 2000 2000 2000 2000 2000 2000 Discount factor PVF @ 19% 1 0.840336 0.706165 0.593416 0.498669 0.419049 0.352142 Discounted cash flows -6960 1680.672 1412.33 1186.832 997.3375 838.0987 704.2847 [b] NPV= Sum of discounted cash flows -140.446 [c] Time line 0 1 2 3 4 5 6 Cost of new washer -8400 Proceeds of old washer selling price*( 1 -tax rate) 1440 Total investment in new machine -6960 Initial Investment outlay -6960 Savings 2400 2400 2400 2400 2400 2400 MACR% 20% 32% 19.20% 11.52% 11.52% 5.76% -Depreciation cost of washer*MACR%age -1680 -2688 -1612.8 -967.68 -967.68 -483.84 Pre tax operating cashflow 720 -288 787.2 1432.32 1432.32 1916.16 -taxes pretax cashflow*(1-tax) 432 -172.8 472.32 859.392 859.392 1149.696 +Depreciation 1680 2688 1612.8 967.68 967.68 483.84 after tax operating cash flow 2112 2515.2 2085.12 1827.072 1827.072 1633.536 Reversal of Net working capital 0 Proceeds from sale of assets selling price*(1 - tax rate) 0 +Salvage book value * tax rate 0 Terminal year non operating cash flows 0 Total Cash flow for the period -6960 2112 2515.2 2085.12 1827.072 1827.072 1633.536 Discount factor (1+discount rate)^n 1 0.840336 0.706165 0.593416 0.498669 0.419049 0.352142 Discounted cash flows -6960 1774.79 1776.146 1237.343 911.1037 765.6334 575.2372 NPV= Sum of discounted cash flows 80.25311
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.