Question

You need to evaluate the purchase of a new molding machine. The equipment's basic price is $105,944, and it would cost another $11,772 to modify it for special use by your firm. The molding machine, which falls into the MACRS 3year class, would be sold after 3 years for $42,378. The MACRS rates for the first three years are 0.3333,0.4445, and 0.1481 . Use of the equipment would require an increase in net working capital (spare parts inventory) of $6,229. The machine would have no effect on revenues, but it is expected to save the firm $45,805 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 21.0% and its cost of capital is 14.0%. How much is the year 2 NOPAT for this project?

a)($5,663)
b)($4,111)
c)($5,151)
d)($3,477)
e)($5,234)

Answer 1

The year 2 NOPAT for this project is ($5,151).

Step-by-step explanation:

To calculate the year 2 NOPAT (Net Operating Profit After Tax) for this project, we need to calculate the taxable profit and then apply the tax rate. The taxable profit can be calculated by subtracting the depreciation expense from the savings in operating costs. The depreciation expense can be calculated using the MACRS rates. In year 2, the MACRS rate is 0.4445, so the depreciation expense would be 0.4445 multiplied by the initial cost of the machine. The tax rate is 21.0%, so we multiply the taxable profit by (1 - tax rate) to get the NOPAT. Plugging in the values, we get:

Taxable Profit = (Savings in Operating Costs - Depreciation Expense) = (45,805 - (0.4445 * 105,944))

NOPAT = Taxable Profit * (1 - Tax Rate)

NOPAT = (Savings in Operating Costs - (0.4445 * 105,944)) * (1 - 0.21)

NOPAT = ($5,151)