Marz Marz Inc. is considering the purchase of a new machine which will reduce ma

Question

Marz Marz Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $10,000 annually. Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $60,000, what is the project's NPV? [MACRS table required] Select the closest answer. Select one: A. -$12,384 B. -$10,679 C. -$28,565 D. -$21,493 E. -$46,901 Marz Marz Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $10,000 annually. Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $60,000, what is the project's NPV? [MACRS table required] Select the closest answer. Select one: A. -$12,384 B. -$10,679 C. -$28,565 D. -$21,493 E. -$46,901 Select one: A. -$12,384 B. -$10,679 C. -$28,565 D. -$21,493 E. -$46,901 A. -$12,384 B. -$10,679 C. -$28,565 D. -$21,493 E. -$46,901

Explanation / Answer

Hi,

Please find the answer as follows:

Final Year Cash Flow = 10000 - (10000 - 3600)*.40 - 15000 = (7560) + 5640 = (1920)

NPV = - 45000 + 7800(1/1.12)^1 + 10680(1/1.12)^2 + 7560(1/1.12)^3 + 5880(1/1.12)^4 - 1920(1/1.12)^5 = - 21493

Option D is correct.

Thanks.

   

Initial Outlay (-60000+15000) -45000



Operating Cash Flow Year 1 Year 2 Year 3 Year 4 Year 5 Reduction in Cost 5000 5000 5000 5000 5000 After Tax Decrease in Cost (A) 3000 3000 3000 3000 3000 Depreciation with the use of Table 12000 19200 11400 7200 6600 Tax Savings (On Depreciation) (B) 4800 7680 4560 2880 2640 Net Operating Cash Flow (A+B) 7800 10680 7560 5880 5640

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