AuthorTopic: Basic Question 42. Corporate Finance
agalliker
@2014-12-31 16:58:36
Can anybody explain how I can get these numbers ($111,500, $24,750 and $33,000 see solution)? Thanks!

HC Ltd. purchased a machine 4 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of the purchase, and an expected market value of $5,000 at the end of the 10 years. It is being depreciated by the straight-line method toward a salvage value of $25,000; that is depreciation is $7,500 per year. The machine can be sold now for $25,000. A new machine can be purchased for $150,000 including installation costs. During its 6-year life, it will reduce pre-tax cash operating expenses by $30,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worth $50,000. Straight-line depreciation will be used to depreciate the machine to salvage value of $30,000; that is depreciation is $20,000 per year. The firm's tax rate is 30%. The appropriate discount rate is 13%.
What is the NPV of the investment?
A. $1,892 B. $2,573 C. $3,290
C
The initial investment outlay is $111,500. The net operating cash flows are $24,750 (years 1-6) and the total termination cash flow is $33,000 in year 6. The NPV of these cash flows discounted at 13% is $3,290.

CFA Discussion Topic: Basic Question 42. Corporate Finance

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