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19 August, 00:23

Consider a $10,000 machine that will reduce pretax operating costs by $3,000 per year over a 5-year period. Assume no changes in net working capital and a zero scrap value after five years. For simplicity, assume straight-line depreciation to zero, a marginal tax rate of 34 percent, and a required return of 10 percent. The net present value of acquiring this machine is:A) $83. B) $449. C) $689. D) $827. E) $1,235.

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  1. 19 August, 00:24
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    A) $83

    Explanation:

    First, find aftertax OCF per year

    aftertax OCF = (Operating benefit - depreciation) * (1-tax) + depreciation

    Depreciation per year = 10,000/5 = 2,000

    Tax = 34%

    aftertax OCF per year = (3,000 - 2,000) * (1-0.34) + 2,000

    = 660 + 2,000

    = 2,660

    Next, find the PV of the aftertax OCF per year. It is an annuity;

    PMT = 2,660

    N = 5

    I/Y = 10%

    FV = 0

    then CPT PV = 10,083.493

    Subtract the initial cost of the machine to find the Net Present Value (NPV);

    NPV = - $10,000 + $10,083.493

    NPV = $83.493
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