Hi,
This is a rather long problem, can anyone please help to calculate NPV?
HC Ltd. purchased a machine 4 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of the purchase and an expected market value of $5,000 at the end of the 10 years. It is being depreciated by the straight-line method toward a salvage value of $25,000; that is, depreciation is $7,500 per year. The machine can be sold now for $25,000. A new machine can be purchased for $150,000 including installation costs. During its 6-year life, it will reduce pre-tax cash operating expenses by $30,000 per year. Sales are not expected to change. At the end of its useful life, this machine is estimated to be worth $50,000. Straight-line depreciation will be used to depreciate the machine to a salvage value of $30,000; that is depreciation is $20,000 per year. The firm’s tax rate is 30%. The appropriate discount rate is 13%.
What is the NPV of the investment?
A. $1,892
B. $2,573
C. $3,290
Correct Answer: C
The initial investment outlay is $111,500. The net operating cash flows are $24,750 (years 1-6) and the total termination cash flow is $33,000 in year 6. The NPV of these cash flows discounted at 13% is $3,290.