Litchfield Design is evaluating a 3-year project that would involve buying a new

Question

Litchfield Design is evaluating a 3-year project that would involve buying a new piece of equipment for 170,000 dollars today. The equipment would be depreciated straight-line to 10,000 dollars over 2 years. In 3 years, the equipment would be sold for an after-tax cash flow of 20,000 dollars. In each of the 3 years of the project, relevant revenues are expected to be 125,000 dollars and relevant costs are expected to be 55,000 dollars. The tax rate is 50 percent and the cost of capital for the project is 7.57 percent. What is the NPV of the project?

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Thank you for your time .. Can you please answer this one as well?

Oxygen Optimization is considering buying a new, high efficiency purification system. The new system would be purchased today for 16,600 dollars. It would be depreciated straight-line to 1,600 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,500 dollars. The system is expected to reduce costs by 5,700 dollars in year 1 and by 13,800 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 10.3 percent, what is the net present value of the new purification system project?

Explanation / Answer

Calculation of NPV of the project Calculation of after tax operating cash flow Year 1 2 3 Relevant revenue $125,000 $125,000 $125,000 Relevant costs -$55,000 -$55,000 -$55,000 Depreciation -$80,000 -$80,000 $0 Net Income/(loss) -$10,000 -$10,000 $70,000 Tax saving @ 50% $5,000 $5,000 -$35,000 Depreciation $80,000 $80,000 $0 After Tax operating cash flow $75,000 $75,000 $35,000 Calculation of after tax cash flow from the sale of equipment Sale value $20,000 Less : Book value of equipment in 3rd Year $10,000 Gain on sale of equipment $10,000 Less : Tax @ 50% $5,000 Add :Book value of equipment in 3rd year $10,000 After tax cash flow from sale of the equipment $15,000 Calculation of NPV of the project Year Cash flow Discount factor @ 7.57% Present Value 0 -$170,000 1 -$170,000.00 1 $75,000                 0.92963 $69,722.04 2 $75,000                 0.86421 $64,815.51 3 $50,000                 0.80339 $40,169.51 NPV of the project $4,707.06

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