What If Taxable Income Is Negative
Question: NPV Question?
Please help me with this homework question. We did not cover any questions this in depth in class.
Your company is considering a machine that will cost $1,000 at Time 0 and can be sold after 3 years for $100. To operate the machine, $200 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $900 per year for 3 years and variable operating costs (excluding depreciation) will be 50 percent of sales. The machine will have depreciation expenses of $400, $300, and $300 in Years 1, 2, and 3, respectively. The company has a 40 percent tax rate, enough Taxable Income from other assets to enable it to get a Tax Refund from this project if the project’s income is negative, and a 10 percent cost of capital. What is the project’s NPV?
Thank You
Answer: $31.20
Use present value tables.
Annual Net Income after tax = $270.00
Depr tax savings = $160 for yr 1, $120 in yrs 2 and 3. Add these numbers to the annual NI after tax. Add the monies recovered in year 3 ($100 + $200).
Subtract the year 0 Machine cost of $1,000 and the $200 for inventories.Discount all numbers with pv tables using factors for 10% cost of capital.
DGAP-UK-Regulatory: Annual report 2010, -17-
DJ DGAP-UK-Regulatory: Annual report 2010, Ringkjobing Landbobank Ringkjobing Landbobank A/S / Annual Financial Report 02.02.2011 08:31 Dissemination
Market Update – August 9, 2010
