Question
Bottoms Up Diaper Service is considering the purchase of a new industrial washer for a 4-year project. The old machine was bought three years ago
Bottoms Up Diaper Service is considering the purchase of a new industrial washer for a 4-year project. The old machine was bought three years ago for $10,000 and will be depreciated to 1,000 using the straight-line method with an assumed life of 5 years. The old machine can be sold for $8,000 now. The new washer can be installed today for $12,000. The new machine will have a 3-year life and will be depreciated to $3,000 using straight-line depreciation. At the end of the project life, the after-tax cash flow of selling the machine is $3,000. With the new washer, the firm is expected to have revenue of $10,000, $12,000, and $13,000 for each of the next three years. The COGS is 40% of the revenue, and the SG&A is $3,000 each year. Suppose Bottoms Up Diaper Services inventories are 15% of total expense. If the opportunity cost of capital is 9%, and the corporate tax rate is 35%, what is the projects NPV?
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