Making Capital Investment Decisions

Isaac, Inc. is thinking about purchasing a new machine. The new machine would cost
$150,000 with an additional $30,000 for delivery of the machine. The machine will have
a life of 5 years and will be depreciated using the straight line method. The machine can
be sold for $25,000 at the end of its life. This machine is expected to produce cost
savings of $35,000 the first two years and $50,000 per year after. It will take $10,000 in
net working capital to maintain the machine. The company has a required return of 7%
and is in the 35% tax bracket. Calculate the NPV of the project and determine if the
company should purchase the machine.
Year
Cost Savings
Depreciation
EBIT
Taxes
Net Income

1
35,000
31,000
4,000
1,400
2,600

2
35,000
31,000
4,000
1,400
2,600

3
50,000
31,000
19,000
6,650
12,350

4
50,000
31,000
19,000
6,650
12,350

5
50,000
31,000
19,000
6,650
12,350

OCF

33,600

33,600

43,350

43,350

43,350

Year
OCF
Change in
NWC
Capital
Investment
Net CF

0
-10,000

5
43,350
10,000

-180,000

25,000

-190,000

1
33,600

33,600

2
33,600

33,600

3
43,350

43,350

Depreciation = (180,000 25,000) / 5 = 31,000

After Tax Salvage Value = 25,000 - .35(25,000 25,000)
NPV = -4,930.10
Do Not Accept Project

4
43,350

43,350

78,350