Please show/explain work. Scott Investors, Inc, is considering the purchase of a
ID: 2779312 • Letter: P
Question
Please show/explain work. Scott Investors, Inc, is considering the purchase of a 412,000 computer with an economic life of 5 years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be 76,000 in five years. The computer will replace 5 office employees whose combined income annual salaries are 121,000. The machine will also immediately lower the firm's required net working capital by 96,000. This amount of networking capital will need to be replaced once the machine is sold. The corporate tax is 34 percent. The appropriate discount rate is 15%. Calculate the NPV on this project.
Explanation / Answer
Year 0 1 2 3 4 5 Purchase of Computer (412,000) Saving in Annual Salaries 121,000 121,000 121,000 121,000 121,000 Reduction in Working Capital 96,000 Sale value of Computer 76,000 Increase in Working Capital (96,000) Tax Saving on Depreciation 22,848 22,848 22,848 22,848 22,848 (412000-76000)/5*0.34 Net Cash Flow (316,000) 143,848 143,848 143,848 143,848 123,848 DF @ 15% 1.00 0.87 0.76 0.66 0.57 0.50 Discounted Cash Flow (316,000) 125,085 108,770 94,582 82,246 61,574 NPV 156,257