FTE Example

An automobile parts manufacturer is evaluating an investment in a new machining tool that could revolutionize its operations, cutting operating costs significantly. Operating costs would fall by $25,000 per year for 5 years. Purchase of the tool requires a $100,000 investment and the tool is in a CCA class with a rate of 10%. The tax rate for the firm is 32% and the firm pays 9% interest on its debt. The firm's current (levered) cost of equity is 14.6%. The firm is currently financed with 50% debt and 50% equity. The risk-free rate is 2% and the market risk premium is 6%. If purchased, the new tool will be financed with 75% debt and 25% equity. The debt is a loan with interest of 9% due at the end of every year. The loan requires level principal repayment over a period of 5 years, which is the estimated useful life of the new tool. It has no expected salvage value.

Calculate the NPV using the FTE method.