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flake center is considering purchasing new manufacturing equipment for 90000. the old network can be sold...

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Accounting

flake center is considering purchasing new manufacturingequipment for 90000. the old network can be sold for 7000. the newnetwork will require additional working capital of 10000. itsanticipated eight-year life will generate additional client revenueof 40000 annually with operating costs, excluding depreciation, of20000. at the end of eight years, it will have a salvage value of9000 and return 8000 in working capital. taxes are notincluded.

1) if the company has a required rate of 12%, what is the netpresent value of the proposed investment?

2) assume taxes are 30%, what is the after-tax NPV of theproposed investment?

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Flake Centre
Particulars Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Total
Cost of new equipment (90,000.00)                  -                    -                    -                    -                    -                    -                    -                    -   (90,000.00)
Salvage of old equipment       7,000.00                  -                    -                    -                    -                    -                    -                    -                    -          7,000.00
Additional working capital (10,000.00)                  -                    -                    -                    -                    -                    -                    -        8,000.00      (2,000.00)
Salvage of new equipment                   -                    -                    -                    -                    -                    -                    -                    -        9,000.00        9,000.00
Net Additional revenue                   -   40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 320,000.00
Net cash flows (93,000.00) 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 57,000.00 244,000.00
PV factor at 12%               1.00             0.89             0.80             0.71             0.64             0.57             0.51             0.45             0.40
Present Value (93,000.00) 35,714.29 31,887.76 28,471.21 25,420.72 22,697.07 20,265.24 18,093.97 23,021.34 112,571.61
NPV is $ 112,571.61
Flake Centre
Particulars Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Total
Net Additional revenue                   -   40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 320,000.00
Less: Depreciation                   -   20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 160,000.00
Taxable Revenue                   -   20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 160,000.00
Tax at 30%                   -        6,000.00      6,000.00      6,000.00      6,000.00      6,000.00      6,000.00      6,000.00      6,000.00     48,000.00
After-tax Revenue                   -   14,000.00 14,000.00 14,000.00 14,000.00 14,000.00 14,000.00 14,000.00 14,000.00 112,000.00
Add: Depreciation                   -   20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 160,000.00
Net Operating cash inflows                   -   34,000.00 34,000.00 34,000.00 34,000.00 34,000.00 34,000.00 34,000.00 34,000.00 272,000.00
Cost of new equipment (90,000.00)                  -                    -                    -                    -                    -                    -                    -                    -   (90,000.00)
Salvage of old equipment       7,000.00                  -                    -                    -                    -                    -                    -                    -                    -          7,000.00
Additional working capital (10,000.00)                  -                    -                    -                    -                    -                    -                    -        8,000.00      (2,000.00)
Salvage of new equipment                   -                    -                    -                    -                    -                    -                    -                    -        9,000.00        9,000.00
Net cash flows (93,000.00) 34,000.00 34,000.00 34,000.00 34,000.00 34,000.00 34,000.00 34,000.00 51,000.00 196,000.00
PV factor at 12%               1.00             0.89             0.80             0.71             0.64             0.57             0.51             0.45             0.40
Present Value (93,000.00) 30,357.14 27,104.59 24,200.53 21,607.61 19,292.51 17,225.46 15,379.87 20,598.04     82,765.77
NPV is $ 82,765.77

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