Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose machine. The machine's total price including installation and delivery is $90,000. The machine falls into the three-year class using straight-line depreciation method, and it will be sold after three years for $0. The use of this new machine will bring revenue of $40,000 for the first year, $45,000 for the second year, and $50,000 for the third year. The annual maintenance expense of $5,000 for the first year, $6,000 for the second year, and $7000 for the third year. The firm's marginal tax rate is 21 percent and the required rate of return is 10%. a. What is the initial investment at t=0 ? (keep your number as a whole number: example of answer format: $1,000 or if it's negative, then -$1,000.00) b. What is the Cash Flow at year 1 ? ( keep your number as a whole number: example of answer format: $1,000 or if it's negative, then -$1,000.00) c. What is the Cash Flow at year 3 ? ( keep your number as a whole number: example of answer format: $1,000 or if it's negative, then -$1,000.00) d. What is NPV ? ( keep your number to two decimals: example of answer format: $1,000.00 or if it's negative, then -$1,000.00)

Answer 1

a. What is the initial investment at t=0?

• -$90,000

b. What is the Cash Flow at year 1?

• $33,950

c. What is the Cash Flow at year 3?

• $40,270

d. What is NPV?

• $1,788.50

Step-by-step explanation:

initial investment $90,000

depreciation per year using straight line depreciation = $90,000 / 3 = $30,000

cash flow year 1 = [($40,000 - $5,000 - $30,000) x 0.79] + $30,000 = $33,950

cash flow year 2 = [($45,000 - $6,000 - $30,000) x 0.79] + $30,000 = $37,110

cash flow year 3 = [($50,000 - $7,000 - $30,000) x 0.79] + $30,000 = $40,270

using an excel spreadsheet I calculated the NPV = $1,788.50