Question
You have the opportunity to invest in a machine that costs $150,000. This is to be depreciated at straight line to zero over three years.
You have the opportunity to invest in a machine that costs $150,000. This is to be depreciated at straight line to zero over three years. The machine generates revenue of $100,000 at the end of year 1. This amount will increase with inflation of 3% per year thereafter. Similarly, the machine requires maintenance costs of $10,000 in year 1. This amount will also will increase with inflation of 3% per year thereafter. The salvage value of the equipment is $27.31k in year 3. The project is housed on land that has been purchased exactly five years ago at $450,000. This value has been increasing with inflation of 3% per year and will continue to increase at 3% in the future. Tax rate is 35%. If the economic life of the machine is three years and the relevant nominal discount rate is 10 percent, should you buy this machine? What is the NPV of the purchase. Show all work using the below template
\begin{tabular}{|c|c|c|c|c|} \hline Years & 0 & 1 & 2 & 3 \\ \hline \multicolumn{5}{|l|}{ Revenue } \\ \hline \multicolumn{5}{|l|}{ - Operating costs } \\ \hline \multicolumn{5}{|l|}{ - Other costs } \\ \hline \multicolumn{5}{|l|}{ - Depreciation } \\ \hline \multicolumn{5}{|l|}{ + Gain from salvage } \\ \hline \multicolumn{5}{|l|}{ = Taxable income } \\ \hline \multicolumn{5}{|l|}{= =Tax @35\% } \\ \hline \multicolumn{5}{|l|}{= NOPAT } \\ \hline \multicolumn{5}{|l|}{ +Depreciation } \\ \hline \multicolumn{5}{|l|}{ - Gain from salvage } \\ \hline \multicolumn{5}{|l|}{= Operating CF } \\ \hline \multicolumn{5}{|l|}{+ Change in NWC } \\ \hline \multicolumn{5}{|l|}{+ Investment } \\ \hline \multicolumn{5}{|l|}{ + Salvage } \\ \hline \multicolumn{5}{|l|}{= Net Cash Flow } \\ \hline & & & & \\ \hline Net Present Value & & & & \\ \hline \end{tabular}Step by Step Solution
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