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QUESTION
For this question start fresh, do not carry over data from earlier questions. You are analyzing the prospects of installing cost saving machinery....
For this question start fresh, do not carry over data from earlier questions. You are analyzing the prospects of installing cost saving machinery. You have the following information:
- The machine costs $92,000 and depreciation is calculated straight line (equal amounts) over 4 years
- Every year, the machine increases cash flows by an amount of $34,000 (Taxes, Opportunity Cost etc. have all been accounted for in this number and there is no Net Working Capital)
- After 3 years (when the machine has only been depreciated for 3 years and therefore the book value is not zero) the machine is sold for $30,000; therefore, this is a 3 year project
- The rate of discount is 9%
- The tax rate is 40%
Hint:Here you have to consider the income due to the salvage sale of the machinery and the taxes on this sale.
What is the NPV of installing the machinery?
