Solution npv and irr cf0 590000 cf1 5 197500 cf6

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Unformatted text preview: 58,400. CF(8) = 158,400 + 41,400 = 199,800. Discount rate = 14%. IRR = 28.13% NPV = RM293,543. We would accept the project! Problem 3 Replacement Project: Old Asset (5 years old): Cost of equipment = RM1,125,000. 10-year project life, 10-year class life. Simplified straight line depreciation. Current salvage value is RM400,000. Cost of capital = 14%, marginal tax rate = 35%. Problem 3 Replacement Project: New Asset: Cost of equipment = RM1,750,000. Shipping & installation will be RM56,000. RM68,000 investment in net working capital. 5-year project life, 5-year class life. Simplified straight line depreciation. Will increase sales by RM285,000 per year. Operating expenses will fall by RM100,000 per year. Already paid RM15,000 for training program. Salvage value after year 5 is RM500,000. Cost of capital = 14%, marginal tax rate = 35%. Problem 3: Sell the Old Asset Salvage value = RM400,000. Book value = depreciable asset - total amount depreciated. Book value = RM1,125,000 - RM562,500 = RM562,500. = 1,125,000 10 Capital gain = SV - BV = 112,500 X 5 = 400,000 - 562,500 = 562,500 = (RM162,500). Tax refund = 162,500 x .35 = RM56,875. Problem 3 Problem Initial Outlay: (1,750,000) + ( 56,000) (1,806,000) + ( 68,000) + 456,875 (1,417,125) Cost of new machine Shipping & installation Depreciable asset NWC investment After-tax proceeds (sold old machine) Net Initial Outlay 400,000 + 56,875 For Years 1 - 5: For 385,000 Problem 3 285,000+100,000 Increased sales & cost savings (248,700) Extra depreciation 136,300 EBT 1,125,000-361,200 (47,705) Taxes (35%) 88,595 EAT 248,700 Depreciation reversal 337,295 = Differential Cash Flow Problem 3 Terminal Cash Flow: Terminal 500,000 500,000 (175,000) (175,000) 68,000 393,000 393,000 Salvage value Tax on capital gain Recapture of NWC Terminal Cash Flow 35%(500,000) Problem 3 Solution NPV and IRR: CF(0) = -1,417,125. CF(1 - 4) = 337,295. CF(5) = 337,295 + 393,000 = 730,295. Discount rate = 14%. NPV = (55,052.07). IRR = 12.55%. We would not accept the project!...
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