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# Calculating the NPW of a Plant Expansion

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?

#### 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

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

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