Omaha Plating Corporation is considering purchasing a machine for $1,500,000.The machine will generate a constant after-tax income of $100,000 per year for 15 years.The firm will use straight-line (SL)depreciation for the new machine over 10 years with no residual value.Note: the PV factor for 5 years,10% is 0.386;the PV annuity factor for 10%,10 years is 6.145;and,the PV annuity factor for 10%,5 years is 3.791.
Required: Using the desired rate of return of 10%,what is the estimated net present value (NPV)of the investment project (rounded to the nearest thousand)? Assume that the cash flows occur at year-end.

Question

Quizplus · Accepted Answer

Feedback: Initial investment outlay (time period 0)= $1,500,000.PV of stream of after-tax cash flows,first 10 years = $250,000 x PV Annuity factor from Table 2 (at 10%)= $250,000 x 6.145 = $1,536,250.PV of stream of after-tax cash flows,years 11 through 15 = ($100,000 x 3.791)/(1 + 0.10)¹⁰ = ($100,000 x 3.791)/(0.386)= $146,333.Total PV of future cash inflows = $1,536,250 + $146,333 = $1,682,583.Therefore,estimated NPV = $1,682,583 - $1,500,000 = $182,583 or $183,000 (rounded to nearest thousand).

Omaha Plating Corporation Is Considering Purchasing a Machine for $1,500,000