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Market Top Investors, Inc., is considering the purchase of a $340,000 computer with an economic life...

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Finance

Market Top Investors, Inc., is considering the purchase of a$340,000 computer with an economic life of five years. The computerwill be fully depreciated over five years using the straight-linemethod, at which time it will be worth $54,000. The computer willreplace two office employees whose combined annual salaries are$85,000. The machine will also immediately lower the firm’srequired net working capital by $74,000. This amount of net workingcapital will need to be replaced once the machine is sold. Thecorporate tax rate is 24 percent. The appropriate discount rate is11 percent.

  

Calculate the NPV of this project.

Is it worth it to buy this computer?

Answer & Explanation Solved by verified expert
3.6 Ratings (420 Votes)

Time line 0 1 2 3 4 5
Cost of new machine -340000
Initial working capital 74000
=Initial Investment outlay -266000
100.00%
Savings 85000 85000 85000 85000 85000
-Depreciation Cost of equipment/no. of years -68000 -68000 -68000 -68000 -68000 0 =Salvage Value
=Pretax cash flows 17000 17000 17000 17000 17000
-taxes =(Pretax cash flows)*(1-tax) 12920 12920 12920 12920 12920
+Depreciation 68000 68000 68000 68000 68000
=after tax operating cash flow 80920 80920 80920 80920 80920
reversal of working capital -74000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 41040
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows -32960
Total Cash flow for the period -266000 80920 80920 80920 80920 47960
Discount factor= (1+discount rate)^corresponding period 1 1.11 1.2321 1.367631 1.5180704 1.6850582
Discounted CF= Cashflow/discount factor -266000 72900.9009 65676.487 59168.007 53304.51 28461.926
NPV= Sum of discounted CF= 13511.83

Buy computer as NPV is positive
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