Food Bear Grocery Store purchased a new U-Scan machine at a cost of $103,000. An
ID: 2588899 • Letter: F
Question
Food Bear Grocery Store purchased a new U-Scan machine at a cost of $103,000. Annual after tax labor savings are expected to be $20,000 per year. The depreciation is $25,000 per year, so the annual tax shield is $15,000 per year. (A tax shield is the amount the company's income taxes go down because of the depreciation placed in the corporate tax return.) The salvage value for the machine is $3000 at the end of year 4.
What is the net present value of the investment with a discount rate of 12%
Show your calculations.
Hint: Treat all three items as separate cash flows and add them together by year before discounting.
Explanation / Answer
Solution :- Net present value (NPV) = Present value of cash inflows - Present value of cash outflow.
Present value of cash inflows = 20000 * [ 1 - (1.12)- 4 ] / 0.12 + 15000 * [ 1 - (1.12)- 4 ] / 0.12 + 3000 / (1.12)4
= 20000 * [ 1 - 0.6355 ] / 0.12 + 15000 * [ 1 - 0.6355 ] / 0.12 + 3000 / 1.5735
= 20000 * 0.3645 / 0.12 + 15000 * 0.3645 / 0.12 + 1906.58
= 20000 * 3.0375 + 15000 * 3.0375 + 1906.58
= 60750 + 45562.50 + 1906.58
= $ 108219.08 (Rounded off to $ 108219)
Present value of cash outflow = $ 103000 (Given in the question)
Accordingly, Net present value (NPV) = 108219 - 103000
= $ 5219.
Conclusion :- Net present value (NPV) of investment = $ 5219 (approx).