BUYING A MACHINE-NPV ANALYSIS Project life 8 Annual anticipated sales Cost of the machine Annual COGS Annual SG&A Annual depreciation Tax rate Discount rate Annual profit and loss (P&L) Sales Minus COGS Minus SG&A Minus epreciation Profit before taxes Subtract taxes B Profit after taxes Calculating the annual cash flow Profit after taxes 2 Add back depreciation 3 Cash flow 4 5 Calculating the cash flow from salvage value 6 Machine market value, year 8 7 Book value, year 8 8 Taxable gain 29 Taxes paid on gain 30 Cash flow from salvage value 21 NPV Analysis Year Cash flow 0 1 2 3 4 5 6 7 8 NPV Find the NPV of a project which requires a $750,000 machine purchase and has anticipated sales of $1,000,000, COGS of $365,000, SG&A of $299,000, and with depreciation straight-line to 0 over the project's eight year life. The tax rate is 40% and the discount rate is 15%. Assume the machine's market value is $325,000 at the end of the project.