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Western Textiles is considering an investment in a new weaving machine. This machine is for a...

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Western Textiles is considering an investment in a new weavingmachine. This machine is for a growth opportunity, so the newmachine will not replace an existing machine. The new machine ispriced at $214,000 and will require installation costing $26,000.WT plans to use the machine for 4 years, while it will bedepreciated using the MACRS method over its 3-year class life, andthen plans to sell the machine at its expected salvage value of$80,000 at the end of Year 4. The machine will require a $20,000increase in net working capital. It is expected to generateadditional sales revenues of $125,000 per year, but its use alsowill increase annual cash operating expenses by $55,000. WT’srequired rate of return is 10 percent, and its marginal tax rate is40 percent. The machine’s book value at the end of Year 4 will be$0, so WT will have to pay taxes on the $80,000 salvage value.Enter answers in numeric format with no special characters orsymbols.

What is the initial cash outflow at T0 for this project?

What is the Depreciation expense for year 1 through year 4?

What is the supplemental operating cash flow for Year 1 throughyear 4?

What is the Net Present Value for this project?

What is the Internal Rate of Return for the project?

Answer & Explanation Solved by verified expert
3.8 Ratings (533 Votes)

Tax rate 40%
Year-0 Year-1 Year-2 Year-3 Year-4
Sale               125,000                 125,000               125,000               125,000
Less: Operating Cost                  55,000                   55,000                 55,000                  55,000
Contribution                 70,000                   70,000                 70,000                 70,000
Less: Depreciation as per table given below                  79,992                 106,680                 35,544                  17,784
Profit before tax                  (9,992)                 (36,680)                 34,456                 52,216
Tax                  (3,997)                 (14,672)                 13,782                  20,886
Profit After Tax                  (5,995)                 (22,008)                 20,674                 31,330
Add Depreciation                  79,992                 106,680                 35,544                  17,784
Cash Profit After tax                 73,997                   84,672                 56,218                 49,114
Cost of machine                 240,000
Depreciation                 240,000
WDV                            -  
Sale price                   80,000
Profit/(Loss)                   80,000
Tax                   32,000
Sale price after tax                   48,000
Depreciation Year-1 Year-2 Year-3 Year-4 Total
Cost               240,000                 240,000               240,000               240,000
Dep Rate 33.33% 44.45% 14.81% 7.41%
Deprecaition                  79,992                 106,680                 35,544                  17,784             240,000
   
   
Calculation of NPV
10.00%
Year Captial Working captial Operating cash Annual Cash flow PV factor Present values
0              (240,000)                 (20,000)              (260,000) 1.000            (260,000)
1                 73,997                  73,997 0.909               67,270
2                 84,672                  84,672 0.826               69,977
3                 56,218                  56,218 0.751               42,237
4                  48,000                   20,000                 49,114               117,114 0.683               79,990
Net Present Value                   (526)
Calculation of IRR
9.00% 10.00%
Year Total cash flow PV factor @ 9% Present values PV factor @ 10% Present values
0              (260,000) 1.000              (260,000) 1.000              (260,000)
1                  73,997 0.917                 67,887 0.909                 67,270
2                  84,672 0.842                 71,267 0.826                 69,977
3                  56,218 0.772                 43,410 0.751                 42,237
4               117,114 0.708                 82,966 0.683                 79,990
                  5,530                     (526)
IRR =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
IRR '=9%+ (10%-9%)*(5530.22/(5530.22-(-526.04)
9.913%

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Transcribed Image Text

Western Textiles is considering an investment in a new weavingmachine. This machine is for a growth opportunity, so the newmachine will not replace an existing machine. The new machine ispriced at $214,000 and will require installation costing $26,000.WT plans to use the machine for 4 years, while it will bedepreciated using the MACRS method over its 3-year class life, andthen plans to sell the machine at its expected salvage value of$80,000 at the end of Year 4. The machine will require a $20,000increase in net working capital. It is expected to generateadditional sales revenues of $125,000 per year, but its use alsowill increase annual cash operating expenses by $55,000. WT’srequired rate of return is 10 percent, and its marginal tax rate is40 percent. The machine’s book value at the end of Year 4 will be$0, so WT will have to pay taxes on the $80,000 salvage value.Enter answers in numeric format with no special characters orsymbols.What is the initial cash outflow at T0 for this project?What is the Depreciation expense for year 1 through year 4?What is the supplemental operating cash flow for Year 1 throughyear 4?What is the Net Present Value for this project?What is the Internal Rate of Return for the project?

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