Question

Clearwiven Systems ifd. is considering the purchase of a new machine for 5335,000 . The firm's old machine has a book value of Sto, ooo tuut can be sold tortay fir \$ro, 0oo. The oew machine wilt be subject to a cCA rate of 25 percent. it is expected to sarme an annual cark thow of $62000 per year for 7 years through reduced fuel and maintenance expenses. The company will need to invest $12,000 in spare parts inventory fworking capital) when they purchase the machine. At the end of the 7 years the company believes it can sell the machine for 520,000 . Clearview Systems itd, has a 12 percent cost of capital and a 30 percent tax rate. Required: Gather the relevant information into the key facts of this case and compute the Net Present Value for this capital budgeting deciston

Answer 1

The question involves assessing a capital budgeting decision through Net Present Value calculation by considering costs, salvage value, CCA rate, tax rate, and working capital.

Step-by-step explanation:

The student is asking about a capital budgeting decision involving the purchase of a new machine. Relevant information for computing the Net Present Value (NPV) includes the cost of the new machine, the sale price of the old machine, the depreciation rate (CCA), expected annual cash flows, working capital investment, salvage value of the new machine, cost of capital, and the tax rate.

To calculate the NPV, we need to determine the initial outlay, which is the cost of the new machine minus the sale of the old machine plus the working capital needed. Then, we calculate the after-tax cash flows by accounting for depreciation and taxes. We discount these annual cash flows back to the present value at the firm's cost of capital, and consider the terminal cash flow, which includes the salvage value of the new machine. Summing these present values minus the initial outlay will give us the NPV of this investment.