Mars Inc. is considering the purchase of a new machine which will reduce manufac

Question

Mars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $60,000.

a.   -$15,394

b.   -$14,093

c.   -$58,512

d.   -$21,493

e.   -$46,901

*Note (Can You show me how to do this problem on the Finanacial Calculator with all the steps)

Thank You!

Explanation / Answer

d. -$21,493

Working notes:

1) Initial investment

2) After tax salvage value

Year 0 1 2 3 4 5 Savings $5,000 $5,000 $5,000 $5,000 $5,000 Depreciation $12,000 $19,200 $11,520 $6,912 $6,912 Operating income -$7,000 -$14,200 -$6,520 -$1,912 -$1,912 Tax -$2,800 -$5,680 -$2,608 -$765 -$765 Net income -$4,200 -$8,520 -$3,912 -$1,147 -$1,147 Operating cash flows $7,800 $10,680 $7,608 $5,765 $5,765 Initial investment $45,000 After tax salvage value $7,382 Increase in nwc -$15,000 Net cash flows -$45,000 $7,800 $10,680 $7,608 $5,765 -$1,853 cost of capital $1 $0.893 $0.797 $0.712 $0.636 $0.567 PV of cash flows -$45,000 $6,964 $8,514 $5,415 $3,664 -$1,051 NPV -$21,494

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