Photographic laboratories recover and recycle the silver used in photographic fi
ID: 2627038 • Letter: P
Question
Photographic laboratories recover and recycle the silver used in photographic film. Stikine River Photo is considering purchase of improved equipment for their laboratory at Telegraph Creek. Here is the information they have:
1.)The equipment costs $105,500 and will cost $84,400 per year to run.
2.) It has an economic life of 10 years but can be depreciated over five years by the straight-line method.
3.) It will recover an additional 5,000 ounces of silver per year.
4.) Silver is selling for $21 per ounce.
5.)Over the past 5 years, the price of silver has appreciated by 4.5% per year in real terms. Silver is traded in an active, competitive market.
6.) Stikine's marginal tax rate is 30%. Assume U.S. tax law.
7.)Stikine's company cost of capital is 9% in real terms.
8.)The nominal interest rate is 7%.
What is the NPV of the new equipment?
Explanation / Answer
Formula for Excel
A B C D E F 33 Assumptions 34 Equipment cost $105,500 35 Annual cost to operate $84,400 36 Depreciation (years 1-5) $21,100 37 Silver ounces per year 5,000 38 Silver price per ounce $21 39 Marginal tax rate 35% 40 Cost of capital (real) 9% 41 42 What is the NPV of the new equipment? Make additional assumptions as necessary. 43 44 Assumed nominal cost of capital: 7% 45 46 Net Present Value 47 Present value of tax shield 30,280 48 Present value of silver 682,500 49 Present value of operating costs (352,073) 50 Less: equipment costs ($105,500) 51 Net Present Value 255,207