Market Top Investors, Inc., is considering the purchase of a $365,000 computer with an economic life...

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Market Top Investors, Inc., is considering the purchase of a$365,000 computer with an economic life of four years. The computerwill be fully depreciated over four years using the straight-linemethod, at which time it will be worth $114,000. The computer willreplace two office employees whose combined annual salaries are$95,000. The machine will also immediately lower the firm’srequired net working capital by $84,000. 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 is9 percent. Calculate the NPV of this project. (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

Please help figure out where I am making a mistake:

Streight line Method depreciation: Accumulated Depreciation =Cost of Asset/Economic Life
Year01234
Savings inannual cost before tax)$95,000$95,000$95,000$95,000
Depreciation Exense($91,250)($91,250)($91,250)($91,250)
NetSavings before tax$3,750$3,750$3,750$3,750
LessTax$2,850$2,850$2,850$2,850
After Tax Savings$900$900$900$900
Initial Investemetn($365,000)
After TaxSalvage Value$     86,640.00
Working Capital$84,000($84,000)
Add backdepreciation expense$91,250$91,250$91,250$91,250
NetCash Flow($281,000)$         92,150.00$92,150$92,150$94,790
PVFactor @9%10.9174311930.8416799930.772183480.77218348
PV($281,000)$         84,541.28$77,560.81$71,156.71$73,195.27
NPV$25,454.08

Answer & Explanation Solved by verified expert
3.9 Ratings (687 Votes)

Time line 0 1 2 3 4
Cost of new machine -365000
Initial working capital 84000
=Initial Investment outlay -281000
100.00%
Savings 95000 95000 95000 95000
-Depreciation Cost of equipment/no. of years -91250 -91250 -91250 -91250 0
=Pretax cash flows 3750 3750 3750 3750
-taxes =(Pretax cash flows)*(1-tax) -900 -900 -900 -900
+Depreciation 91250 91250 91250 91250
=after tax operating cash flow 94100 94100 94100 94100
reversal of working capital -84000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 86640
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 2640
Total Cash flow for the period -281000 94100 94100 94100 96740
Discount factor= (1+discount rate)^corresponding period 1 1.09 1.1881 1.295029 1.4115816
Discounted CF= Cashflow/discount factor -281000 86330.27523 79202.087 72662.465 68533.055
NPV= Sum of discounted CF= 25727.88

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