Mc. Company is considering the purchase of a new 400-ton stamping press. The pre
ID: 2639091 • Letter: M
Question
Mc. Company is considering the purchase of a new 400-ton stamping press. The press costs $360,000, and an additional $40,000 is needed to install it. The press will be depreciated straight-line to zero over a five-year life. The press will generate no additional revenues, but it will reduce cash operating expenses by $140,000 annually. The press will be sold for $120,000 after five years. An inventory investment of $60,000 is required during the life of the investment. McConachie is in the 40 percent tax bracket. The required return is 10%.
A) What is CF0? -540,000; -400,000; -460,000; or-340,000
B) What is CF1? 119,400; 116,000; 108,000; or 80,000
C) What is CF5? 154,000; 132,000; 248,000; or 116,000
D) What is the NPV of the project? 61,693; 42,185; -74,256; or -15,365
Explanation / Answer
A =-360,000-40,000-60,000= -460,000 Depreciation = 400,000/5= 80,000 B= 140,000(1-.4) + tax saving on deprciation i.e.80,000*.40=116,000 C= 140,000(1-.4) + tax saving on deprciation i.e.80,000*.40+ sale of inventory i.e.60,000+ Sale of equipment net of tax 120,000(1-.4)=84,000+32,000+60,000+72,000=248,000 Particulars Time PV Amount PV Cash Outflows Purchase - 1.00 (400,000.00) (400,000.00) Increase in inventory - 1.00 (60,000.00) (60,000.00) Savings (net of tax) 1.00 0.91 116,000.00 105,454.55 Cash Outflows 2.00 0.83 116,000.00 95,867.77 Cash Outflows 3.00 0.75 116,000.00 87,152.52 Cash Outflows 4.00 0.68 116,000.00 79,229.56 Cash Outflows 5.00 0.62 248,000.00 153,988.49 NPV 61,692.88