F G H I J ACME manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labor than the existing line. The new line would cost $1 million, have a five-year life, and be depreciated using MACRS over three years. At the end of five years, the new line could be sold as scrap for $200,000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in a saving of $40,000 per year before tax and unadjusted for inflation (in today's dollars). Additional sales with the new machine are expected to result in additional net cash inflows, before tax, of $60,000 per year (in today's dollars). If ACME invests in the new line, a one-time investment of $10,000 in additional working capital will be required. The tax rate is 35 percent, the opportunity cost of capital is 10 percent, and the annual rate of inflation is 3 percent. Cost: Life of the Project (Years): MACRS Recovery Period: Salvage Value (in terminal year $'s): A Operating Costs (in current S's): A Sales (in current S's): A Working Capital (in year 0): Tax Rate: D 2 3 4 Cost of Capital: Inflation Rate: 5 What is the NPV of the new production line? Hint Use the MACRS table and the template below to calculate the net incremental cash flows and then the NPV MACRS Depreciation Schedules by Allowable Recovery Periodi Year 3-Year 5-Year 7-Year 10-Year 1 33.33% 20.00% 14.29% 10.00% 2 44.45% 32.00% 24.49% 18.00% 3 14.81% 19,20% 17.49% 14.40% 4 7.41% 11.52% 12.49% 11.52% 5 11.52% 8.93% 9.22% 6 5.76% 8.92% 7.37% 7 8.93% 6.55% 8 4.46% 6.55% 9 6.56% 10 6,55% 11 3.28 % 5 7 8 9 0 1 2 3 4 25 26 27 28 29 30 31 32 33. A Revenue A Operating Expenses EBITDA Less: Depreciation & Amortization EBIT Taxes NOPAT Plus: Depreciation & Amortization Cash Flows from Operations Capital Expenditures (project cost) Salvage Value Tax on Salvage Value Changes in Working Capital Net Cash Flows Net Present Value (formula): Net Present Value (function): Cash Flow Calculations for ACME Manufacturing Year 0 1 2 3 4 5