Net Present Value (Finance Problem)

[GTaudiophile]

My cousin just sent me this problem. Anyone want to help me solve it?

Questionable, Inc is considering the purchase of a new machine of $55,000 that will increase rev. by $11,000 annually. The new machine will also enable the firm to reduce the need for inventory by $12,000 when the machine is installed. The reduced need for inventory will be reversed at the conclusion of the project. Questionable's marginal tax rate is 40% and the cost of capital is 5.6078%. Questionable will depreciate the machine to $5,000 using the 5 yr straight line method and expects to sell the machine for $12,000 at the end of yr 5. Describe the problem to your boss on whether you should accept or reject.

 

[Broohaha]

does the NPV exceed 0? if so, accept the project. 😀

 

[GTaudiophile]

Originally posted by: Broohaha
does the NPV exceed 0? if so, accept the project. 😀

h4r h4r

Edit: Time to dust off solver.

 

[GTaudiophile]

Would the salvage value be $5K or $12K?

 

[GTaudiophile]

None of you geniuses out there want to help me?

 

[elanarchist]

Salvage value is 12k - ((12k - 5k)* .4) = 9.2k. This is because there is still a residual value at the end in the amount of 5k that the company did not depreciate, so it gets a tax break for this amount. It still has to pay the tax for the remaing 7k from the sale at the tax rate, 40%.