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I need to calculate the Net Present Value of the new project, an example of how to do it was provided to me but could
I need to calculate the Net Present Value of the new project, an example of how to do it was provided to me but could someone do it in their own way (by hand not on excel please) and just briefly explain how it's done?
Example: Replacement Problem Original Machine Initial cost = 100,000 CCA rate = 20% Purchased 5 years ago Salvage today = 65,000 Salvage in 5 years = 10,000 New Machine Initial cost = 150,000 5-year life Salvage in 5 years = 0 Cost savings = 50,000 per year CCA rate = 20% Required return = 10% Tax rate = 40% Example: Replacement Problem Continued Remember that we are interested in incremental cash flows If we buy the new machine, then we will sell the old machine What are the cash flow consequences of selling the old machine today instead of in 5 years? Example: Replacement Problem continued If we sell the old equipment today, then we will receive $65,000 today. However, we will also NOT receive $10,000 in 5 years The appropriate number to use in the NPV analysis is the net salvage value Always consider after-tax cash flows You can use your calculator for the cash flows and salvage, but there are no short cuts for finding the PV of the CCA tax shield Net present value of the project is: Example: Replacement Problem Original Machine Initial cost = 100,000 CCA rate = 20% Purchased 5 years ago Salvage today = 65,000 Salvage in 5 years = 10,000 New Machine Initial cost = 150,000 5-year life Salvage in 5 years = 0 Cost savings = 50,000 per year CCA rate = 20% Required return = 10% Tax rate = 40% Example: Replacement Problem Continued Remember that we are interested in incremental cash flows If we buy the new machine, then we will sell the old machine What are the cash flow consequences of selling the old machine today instead of in 5 years? Example: Replacement Problem continued If we sell the old equipment today, then we will receive $65,000 today. However, we will also NOT receive $10,000 in 5 years The appropriate number to use in the NPV analysis is the net salvage value Always consider after-tax cash flows You can use your calculator for the cash flows and salvage, but there are no short cuts for finding the PV of the CCA tax shield Net present value of the project isStep by Step Solution
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