The Miracle company is evaluating the purchase of a tool that falls under the 3-
ID: 2664440 • Letter: T
Question
The Miracle company is evaluating the purchase of a tool that falls under the 3-year asset life category for MACRS and is expected to a 4 year life. The tool will cost $700,000. If the tool is purchased, inventories and accounts payable will have to increase upon purchase by $50,000 and $10,000, respectively. With the additional flexibility from the manufacturing tool, sales are expected to increase by $600,000 the first year and not grow further while maintenance expenses will increase $300,000. Any net operating working capital will be recovered at the end of the project as well as the manufacturing tool can be sold for $50,000. Miracle co. has a 10% WACC and a 40% tax rate. What is the NPV for the tool investment?Explanation / Answer
Year Investment Sales Maintenance Depreciation Net Income NI after Taxes Cash Flows 0 (700,000.00) 1 600,000.00 (300,000.00) (233,310.00) 66,690.00 26,676.00 259,986.00 2 600,000.00 (300,000.00) (311,150.00) (11,150.00) 311,150.00 3 600,000.00 (300,000.00) (103,670.00) 196,330.00 78,532.00 182,202.00 4 600,000.00 (300,000.00) (51,870.00) 248,130.00 99,252.00 151,122.00 Year Cash Flows PVF Present Values 0 (740,000.00) 1.00 (740,000.00) 1 259,986.00 0.91 236,350.91 2 311,150.00 0.83 257,148.76 3 182,202.00 0.75 136,891.06 4 151,122.00 0.68 103,218.36 Net Present Value (6,390.91) Notes : Net Income : Sales Less: Maintenance Expenses Depreciation Income Tax= NI * 40% Cash Flows= NI + Depreciation