Finance

My company is considering a machine which will cost $50,000 at Time 0 that can be sold after 3 years for $10,000. $12,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered when the operation is closed at the end of Year 3. The facility will produce sales revenues of $50,000/year for 3 years; variable operation costs (excluding depreciation) will be 40% of sales. No fixed costs will be incurred. Operating cash inflows will begin 1 year from today (at t = 1). By an act of Congress, the machine will have depreciation expenses of $40,000, $5,000, and $5,000 in Years 1, 2, and 3 respectively. The company has 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative, and a 15 percent cost of capital. Inflation is zero. What is the project's NPV?

Cost of new machine: $50,000

Increase in working capital= $12,000

Total= $62,000

Therefore, initial investment oulay in year 0= $62,000

Net after tax operating cash flow in years 1-3

Tax rate= 40%

Variable cost= 40% of sales

Year Sales Variable cost (VC) @ 40% Depreciation Income before taxes (sales -vc- depreciation) Tax / Tax creditt (@ 40%) Net income After tax cash flow (Add back depreciation)

1 $50,000 $20,000 $40,000 -$10,000 -$4,000 -$6,000 $34,000

2 $50,000 $20,000 $5,000 $25,000 $10,000 $15,000 $20,000

3 $50,000 $20,000 $5,000 $25,000 $10,000 $15,000 $20,000

$50,000

Note: If there in a loss the company gets a tax credit

Terminal cash flow

Terminal cash flow = Recovery of working capital + Cash flow from sale of machine - Tax on profit on sale of machine

Book value of machine at the end of 3 years =  Initial value - Accumulated depreciation

Initial Value= $50,000

Accumulated depreciation= $50,000

Book value = $0

Year Depreciation Amount

1 $40,000

2 $5,000

3 $5,000

Total= $50,000

After tax cash flow from sale of machine...