Please post an image of work using excel: • You are a financial manager at a sof

Question

Please post an image of work using excel:

• You are a financial manager at a soft-drink company. Until today the company bought empty cans from an outside supplier for $0.22/can. You are considering whether to begin manufacturing cans in-house to achieve cost savings.

• The cost of purchasing a can machine is $850,000 and the lifespan of the machine is 10 years. At the end of 10 years, the company expects to sell the machine for $160,000. Assume the machine is depreciated on a straight-line basis to zero.

• The cost of producing a can using the in-house machine is $0.17.

• The machine would be purchased at year 0, and all subsequent cash flows occur in year 1-10.

• Assume the discount rate is 10% and the corporate tax rate is 36%. Also assume that the project does not require an investment in Net Working Capital.

• Assume that the company will produce and sell 3 million cans annually. Determine the NPV of moving to in-house production relative to the current situation. Should you accept or reject the project?

Explanation / Answer

We need to compare the savings in cost of cans to the intial purchase cost of machine.

Depreciation per year = $850000 / 10 = $85,000

Tax shield of depreciation per year = $85,000 x 36% = $30,600

Savings in cost of cans per year (Net of tax) = 3,000,000 x ($0.22 - $0.17) x (1 - 0.36) = $96,000

Salvage Value net of Tax = $160,000 x (1 - 0.36) = $102,400

6.14456710558

(cumulative factor)

Since, the NPV is negative, the company should reject the project.

NPV Particulars Years PVF@10% Amount Present Value Savings in Cost of Cans 1-10

6.14456710558

(cumulative factor)

$96,000 $589.878 Add: Tax shield on depreciation 1-10 6.14456710558 $30,600 $188,024 Add: Salvage Value 10 0.3855432894 $102,400 $39,480 Total Cash Inflows $817,382 Less: Cost of Machine 0 1 $850,000 $850,000 NPV (-)$32,618

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