Sundae Corporation
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Sundae Corporation is considering the replacement of an existing machine. The new machine would provide better sundaes, but it costs $120,000. The X-tender requires $20,000 in setup costs that are expensed immediately and $20,000 in additional working capital. The X-tender's useful life is 10 years, after which it can be sold for a salvage value of $40,000. Canton uses straight-line depreciation, and the machine will be depreciated to a book value of $0 on a six-year basis Canton has a tax rate of 45% and a 16% cost of capital on projects like this one. The X-tender is expected to increase revenues minus expenses by $35,000 per year. What is the NPV of buying the X-tender?
My answer is...
N = 10 || i = 16% || Tax rate = 45% || SV year 10 = 40,000
P = - 120,000 - 20,000 - 20,000 = - 160,000
Depreciation = (120,000-40,000)/6 = 13,333.33
Yearly flow Years 1 to 6:
A1-6 = 35,000 - (35,000-13,333.33)*45% = 25,250
Yearly flow Years 7 to 10:
A1-6 = 35,000 - (35,000)*45% = 19,250
NPV = - 160,000 + 25,250*(P/A,i=16%,N=6) + 19,250*(P/A,i=16%,N=4) + 40,000*(P/F,i=16%,N=10)
NPV = - 160,000 + 25,250*(3.6847) + 19,250*(2.7982) + 40,000*(0.2267)
NPV = -4,027.98
Am I correct???
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Solution Summary
This solution illustrates how to compute the net present value of an investment.
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