Question

Natchez, Inc. is considering the purchase of a new machine costing $200,000. The company will incur $5,000 per year in cash operating expenses but it will allow the company to earn an additional $100,000 per year in revenues. Natchez expects the machine to provide future benefits for 3 years and salvage value at the end of the 3-year period to be $10,000. The company uses straight-line depreciation method. The income tax rate is 30%. If the required rate of return is 10%, how much is the net present value of this project

Answer 1

$20,138.74

Step-by-step explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

To determine cash flow, use this formula

Cash flow = (revenue - cost - depreciation) (1 - tax rate) + depreciation

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

(200,000 - 10,000) / 3 = 63,333

(100,000 - 5000 - 63,333) x ( 1 - 0.3) + 63,333 = 85499.90

Cash flow in year 0 = $-200,000

Cash flow in year 1 = 85499.90

Cash flow in year 2 = 85499.90

Cash flow in year 3 = 85499.90 + 10,000 = 95,499.90

I = 10

NPV = $20,138.74

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute