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Machine Investment Financial Analysis

The company buys a $500,000 machine that is depreciated over 5 years for tax purposes. The investment results in $200,000 annual cost savings before taxes over those 5 years. At the end of 5 years, the machine is estimated to sell for $75,000. The NPV of the investment is $165,921.09, the IRR is 19.2%, and the payback period is 2.5 years, so the investment is economically attractive.

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438 views4 pages

Machine Investment Financial Analysis

The company buys a $500,000 machine that is depreciated over 5 years for tax purposes. The investment results in $200,000 annual cost savings before taxes over those 5 years. At the end of 5 years, the machine is estimated to sell for $75,000. The NPV of the investment is $165,921.09, the IRR is 19.2%, and the payback period is 2.5 years, so the investment is economically attractive.

Uploaded by

Maisam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd

A company buys a machine for $500,000 and depreciates it on a straight-line basis over a five-year period for tax pu

investment would result in cash cost savings of $200,000 per year, before taxes , for five years. At the end of the fiv
estimated that the machine would be sold for $75,000. The gain on the sale of the machine would be taxed at a 40%
investment in the machine attractive in economic terms , given all of the cash flows ? Please assume that the cash fl
end of each year, that the tax rate is 40%, and that the appropriate discount rate is 8%. What is net present value ? th
return ? the payback period ?

Cost of Machine $500,000


Salvage Value $75,000
Depreciable Cost $425,000
Useful Life 5
Annual Depreciation $85,000
Discount Rate 8%
Annual Cost Savings $200,000

Year
0 1
Cash Flows ($500,000) $200,000
Less: Depreciation ($85,000)
EBIT ($500,000) $115,000
Less: Taxes @ 40% ($46,000)
Net Income ($500,000) $69,000
Add: Depreciation $85,000
Operating Cash Flow ($500,000) $154,000
Proceeds from Sale of Equipment
Total Cash Flow ($500,000) $154,000

NPV $165,921.09
IRR 19.20%

Payback Schedule
Year Beginning Unrecovered Investment Cash Inflow
0 $500,000 $0
1 $500,000 $200,000
2 $300,000 $200,000
3 $100,000 $200,000

Since only $100,000 need to be recovered in year 3 while cash inflows are $200,000, then the investment would be
recovered in a fraction of year 3. To calculate that fraction: $100,000/$200,000 = 0.5

Payback Period = 2.5 Years


Since only $100,000 need to be recovered in year 3 while cash inflows are $200,000, then the investment would be
recovered in a fraction of year 3. To calculate that fraction: $100,000/$200,000 = 0.5

Payback Period = 2.5 Years

Yes, the investment in the machine attractive in economic terms since it has a positive NPV and
an IRR that is higher than the cost of capital
line basis over a five-year period for tax purposes. The
taxes , for five years. At the end of the five years , it was
le of the machine would be taxed at a 40% rate. Is the
cash flows ? Please assume that the cash flows occure at the
nt rate is 8%. What is net present value ? the internal rate of

2 3 4 5
$200,000 $200,000 $200,000 $200,000
($85,000) ($85,000) ($85,000)($85,000)
$115,000 $115,000 $115,000 $115,000
($46,000) ($46,000) ($46,000)($46,000)
$69,000 $69,000 $69,000 $69,000
$85,000 $85,000 $85,000 $85,000
$154,000 $154,000 $154,000 $154,000
$75,000
$154,000 $154,000 $154,000 $229,000

Ending Unrecovered Investment


$500,000
$300,000
$100,000
($100,000)

re $200,000, then the investment would be


00,000 = 0.5
re $200,000, then the investment would be
00,000 = 0.5

t has a positive NPV and

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