Net Present Value Analysis with Taxes. Morales Company would like to purchase a new machine for $100,000. The machine will have a life of 5 years with no salvage value, and is expected to generate annual cash revenue of $50,000. Annual cash expenses, excluding depreciation, will total $24,000. The company uses the straight-line depreciation method, has a tax rate of 40 percent, and requires a 12 percent rate of return.

Required:

1. Find the net present value of this investment using the format presented in Figure 6.7. Round to the nearest dollar.

2. Should the company purchase the machine? Explain.

Today Year Year Year 1 Timeline (n) Year Year 3 2 $(400,000) (50,000) Purchase price Working capital Annual after-tax cash receipts Annual depreciation tax savings Total cash in (out) PV factor (r = 10%) Present value $(450,000) x 1.0000 $(450,000) + $ 30,000 32,000 $ 62,000 x 0.9091 $ 56,364 + $36,000 32,000 $ 68,000 x 0.8264 $ 56,195 + $ 72,000 32,000 $104,000 X 0.7513 $ 78,135+ $120,000 32,000 $152,000 x 0.6830 S103,816 + $ 50,000 78,000 32.000 $160,000 x 0.6209 $ 99,344 $ (56,146)