Jones Crusher Company is evaluating the proposed acquisition of a new machine.The machine will cost $190,000,and it will cost another $33,000 to modify it for special use by the firm.The machine falls into the MACRS 3-year class,and it will be sold after 3 years of use for $110,000.The machine will require an increase in net working capital of $9,000 and will have no effect on revenues,but is expected to save the firm $90,000 per year in before-tax operating costs,mainly labour.The company's marginal tax rate is 40%.What is the NPV for the proposed acquisition if the cost of capital is 14%?

Question

Quizplus · Accepted Answer

Step 1 - Compute the initial cash flow.
Initial Cash Flow = - (Initial purchase price of new asset) - (Installation/shipping cost of new asset) - (Increase in net working capital)
Initial Cash Flow = -$190,000 - $33,000 - $9,000
Initial Cash Flow = -$232,000
Step 2 - Compute the operating cash flows.
EBIT = R - OE - Depr
EBIT = $90,000 - ($223,000 × 33.33%) = $15,674
OCF = EBIT × (1 - T) + Depr
OCF = $15,674 × (1 - 0.40) + ($223,000 × 33.33%) = $83,730
 11ea7fdb_fc81_781c_a768_839c8f0b5652_TB2902_00 Step 3 - Compute the terminal cash flow
 11ea7fdb_fc81_781d_a768_afb45aefe265_TB2902_00 Step 4 - Compute the NPV
NPV = -232,000 + 83,730/(1.14) + 93,649/ 11ea7fdb_fc81_781e_a768_4f9678ebcffb_TB2902_00 + 148,820/ 11ea7fdb_fc81_781f_a768_effe0c62d22d_TB2902_00 NPV = $13,957

Jones Crusher Company Is Evaluating the Proposed Acquisition of a New