McConachie Company is considering the purchase of a new 400-ton stamping press.
ID: 2745254 • Letter: M
Question
McConachie 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 the McConachie net investment outlay?
b) What is McConachie’s incremental annual after-tax operating cash flow?
c) What is the terminal year after-tax non-operating cash flow at the end of year five?
d) What is the NPV of this project?
Explanation / Answer
A)
Initial out lay = -360,000-40,000-60,000
= -460,000
Depreciation = 400,000/5= 80,000
B)
incremental annual after-tax operating cash flow = 140,000(1-.4) + tax saving on deprciation i.e.80,000*.40
=116,000
C)
terminal year after-tax non-operating cash flow = 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
D)
D)
Particulars year PV Amount PV Cash Outflows Purchase 0 1.00 (400,000.00) (400,000.00) Increase in inventory 0 1.00 (60,000.00) (60,000.00) Savings (net of tax) 1 0.91 116,000.00 105,454.55 Cash Outflows 2 0.83 116,000.00 95,867.77 Cash Outflows 3 0.75 116,000.00 87,152.52 Cash Outflows 4 0.68 116,000.00 79,229.56 Cash Outflows 5 0.62 248,000.00 153,988.49 NPV 61,692.88