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    Calculating the NPW of a Plant Expansion

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    A plant expansion plan calls for the installation of additional production equipment to increase parts production. The equipment costs $200,000 and will generate annual revenues of $100,000. Operation of the equipment requires (annually) $20,000 in labor, $15,000 in material and $5,000 in power and utility costs. The equipment will be classified as a 7-year MACRS property. The company will phase out the equipment at the end of 5 years, at which time it will be sold for $75,000.

    a) Find the year-by-year after tax net cash flow for the project at a 35% marginal tax rate based on the net income. Prepare a table similar to Table 10.2 in the text to display your calculations. You may prepare the table either manually or by using Excel.

    b) Determine the after-tax net present worth of the project if the firm's MARR is 12%. Be sure to include a cash flow diagram and indicate the formulas used to "solve" the cash flow diagram to find NPW. Do you recommend that the firm make the investment in plant expansion?

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    Solution Preview

    Please refer attached file for missing tables.

    a) Salvage Value and Gains Tax
    Total Depreciation claimed in 5 years =$146,450.00
    Purchase Value of Equipment =$200,000.00
    Book Value at the ...

    Solution Summary

    The solution depicts the steps to determine the yearly net cash flows and NPW in the given case. Calculations are provided in MS Excel format.