Clemens Company is considering the purchase of a new machine for $160,000.The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years.At the end of four years, the machine would have no salvage value.The company's cost of capital is 12 percent.The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the net present value for the machine?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the after-tax cash flows and subtracting the initial investment. The annual depreciation is $40,000, leading to a tax shield of $16,000 per year. The after-tax cash flow is $54,552 per year. Discounting these cash flows at 12% and subtracting the initial investment results in an NPV of $2,640.

Clemens Company Is Considering the Purchase of a New Machine