Current Book Value Of Old Machine

Published Date: 02 Nov 2017

The Nobel Dynamite Company is considering a new packing machine. The existing packing machine cost $500,000 five years ago and is being depreciated @ 20% using WDV over a 10-year life. Nobel’s management estimates that the old machine can be sold for $100,000. The new machine costs $600,000 and would be depreciated @ 40% over five years using WDV. There is no salvage value for the new machine. The new machine is more efficient and would reduce packing expenses (damaged goods) by $120,000 per year for the next five years. The marginal tax rate is 30%.Compute the following:

Net incremental cash flows for the project

Compute the NPV and IRR of the project for project acceptance at 10% hurdle

Given Data

 

Old

New

Initial Price

500,000

600,000

Salvage Value

100,000

0

Life

10

5

Depreciation

20%

40%

Current Book Value of Old Machine =

$163840

Capital Gains =

-$63,840

Capital Gains Tax =

-$19152

Calculation For Incremental Depreciation:

Depreciation

1

2

3

4

5

Old

32768

26214.4

20971.52

16777.22

13421.77

New

240000

144000

86400

51840

31104

Incremental(New-Old)

207232

117785.6

65428.48

35062.78

17682.23

Calculation

 

0

1

2

3

4

5

EBITDA(Revenue-Expenses)

0

120,000

120,000

120,000

120,000

120,000

Depreciation

0

207232

117785.6

65428.48

35062.78

17682.23

EBIT

0

-87232

2214.4

54571.52

84937.22

102317.8

Tax

0

-26169.6

664.32

16371.46

25481.16

30695.33

PAT

0

-61062.4

1550.08

38200.06

59456.05

71622.44

Add Back Depreciation

0

207232

117785.6

65428.48

35062.78

17682.23

CAPEX

-500,000

0

0

0

0

0

Capital Gains Tax

-19152

0

0

0

0

0

Net Cash Flow (PAT+Dep+CAPEX-CGT)

-480,848

146,170

119,336

103,629

94,519

89,305

NPV=

-51,475.54

 

 

 

 

 

Hence Incremental Cash Flows are :

 Year ->

0

1

2

3

4

5

Net Cash Flow

-$480,848

$146,170

$119,336

$103,629

$94,519

$89,305

NPV = -$51,475.54

IRR Calculation :

0 = -480,848 + 146,17/(1+r)+119,336(1+r)^2+103,629/(1+r)^3+94,519(1+r)^4+89,305(1+r)^5

By Hit and Trial

NPV at r as 5% = 3855.24

NPV at r as 6% = -8132.46

Hence r = 5% + 3855.24/(3855.24+8132.46) = 5.32%

IRR = 5.32%

The J. J. Hill Company is considering new digging equipmentmachine. The existing digging equipment cost $1,000,000 fiveyears ago and is being depreciated @ 20% using WDV. Hill’s management estimates the old equipment can be sold for $200,000. The new equipment costs$1,200,000 and would be depreciated over five years usingWDV. At the end of the fifth year, Hill’s management intendsto sell the new equipment for $400,000. The new equipment ismore efficient and would reduce expenses by $200,000 per year for the next five years. The marginal tax rate is 35%. Compute the following:

Net incremental cash flows for the project

Compute the NPV and IRR of the project for project acceptance at 10% hurdle

Given Data

 

Old

New

Initial Price

$1,000,000.00

$1,200,000.00

Salvage Value

$200,000.00

$400,000.00

Life

10

5

Depreciation

20%

20%

Current Book Value of Old Machine

=

$327,680.00

Capital Gains

=

-$127,680.00

Capital Gains Tax

=

-$44,688.00

Book Value of New Machine After 5 years

=

$393,216.00

Capital Gains

=

$6,784.00

Capital Gains Tax

=

$2,374.40

Calculation For Incremental Depreciation:

Depreciation

1

2

3

4

5

Old

$65,536.00

$52,428.80

$41,943.04

$33,554.43

$26,843.55

New

$240,000.00

$192,000.00

$153,600.00

$122,880.00

$98,304.00

Incremental(New-Old)

$174,464.00

$139,571.20

$111,656.96

$89,325.57

$71,460.45

Calculation

 

0

1

2

3

4

5

EBITDA(Revenue-Expenses)

$0.00

$200,000.00

$200,000.00

$200,000.00

$200,000.00

$200,000.00

Depreciation

$0.00

$174,464.00

$139,571.20

$111,656.96

$89,325.57

$71,460.45

EBIT

$0.00

$25,536.00

$60,428.80

$88,343.04

$110,674.43

$128,539.55

Tax

$0.00

$8,937.60

$21,150.08

$30,920.06

$38,736.05

$44,988.84

PAT

$0.00

$16,598.40

$39,278.72

$57,422.98

$71,938.38

$83,550.70

Add Back Depreciation

$0.00

$174,464.00

$139,571.20

$111,656.96

$89,325.57

$71,460.45

CAPEX

-$1,000,000.00

$0.00

$0.00

$0.00

$0.00

$400,000.00

Capital Gains Tax

-$44,688.00

$0.00

$0.00

$0.00

$0.00

$2,374.40

Net Cash Flow (PAT+Dep+CAPEX-CGT)

-$955,312.00

$191,062.40

$178,849.92

$169,079.94

$161,263.95

$552,636.76

NPV=

-$53,487.40

 

 

 

 

 

Hence Incremental Cash Flows are :

 Year ->

0

1

2

3

4

5

Net Cash Flow

-$955,312.00

$191,062.40

$178,849.92

$169,079.94

$161,263.95

$552,636.76

NPV = -$53,487.40

IRR Calculation :

0 = -955,312.00 + 191062.4/(1+r) + 178849.92(1+r)^2 + 169079.94/(1+r)^3 + 161263.95(1+r)^4 + 552,636.76(1+r)^5

By Hit and Trial

NPV at r as 8% = 3802.13

NPV at r as 9% = -25511.5

Hence r = 8% +3802.13/(3802.13+25511.5) = 8.13%

Thus IRR = 8.13%

The NeaterMaid Cleaning Service Company is consideringreplacing its existing cleaning equipment. The existing equipment cost $100,000 five years ago and was depreciated @ 40% usingWDV. The management of Neater Maid estimates the old equipment can be sold for $10,000. The newequipment costs $120,000 and would be depreciated @ 40% usingWDV. At the end of five years, Neater Maid’s management expects to sell the new equipment for $20,000. The new equipment is more efficient and would reduce expenses by $20,000 per year for the next five years. Themarginal tax rate is 30%. Compute the following:

Net incremental cash flows for the project

Compute the NPV and IRR of the project for project acceptance at 10% hurdle

Given Data

 

Old

New

Initial Price

$100,000.00

$120,000.00

Salvage Value

$10,000.00

$20,000.00

Life

10

5

Depreciation

40%

40%

Current Book Value of Old Machine

=

$7,776.00

Capital Gains

=

$2,224.00

Capital Gains Tax

=

$667.20

Book Value of New Machine After 5 years

=

$9,331.20

Capital Gains

=

$10,668.80

Capital Gains Tax

=

$3,200.64

Calculation For Incremental Depreciation:

Depreciation

1

2

3

4

5

Old

$3,110.40

$1,866.24

$1,119.74

$671.85

$403.11

New

$48,000.00

$28,800.00

$17,280.00

$10,368.00

$6,220.80

Incremental(New-Old)

$44,889.60

$26,933.76

$16,160.26

$9,696.15

$5,817.69

Calculation

 

0

1

2

3

4

5

EBITDA(Revenue-Expenses)

$0.00

$20,000.00

$20,000.00

$20,000.00

$20,000.00

$20,000.00

Depreciation

$0.00

$44,889.60

$26,933.76

$16,160.26

$9,696.15

$5,817.69

EBIT

$0.00

-$24,889.60

-$6,933.76

$3,839.74

$10,303.85

$14,182.31

Tax

$0.00

-$7,466.88

-$2,080.13

$1,151.92

$3,091.15

$4,254.69

PAT

$0.00

-$17,422.72

-$4,853.63

$2,687.82

$7,212.69

$9,927.62

Add Back Depreciation

$0.00

$44,889.60

$26,933.76

$16,160.26

$9,696.15

$5,817.69

CAPEX

-$110,000.00

$0.00

$0.00

$0.00

$0.00

$20,000.00

Capital Gains Tax

$667.20

$0.00

$0.00

$0.00

$0.00

$3,200.64

Net Cash Flow (PAT+Dep+CAPEX-CGT)

-$110,667.20

$27,466.88

$22,080.13

$18,848.08

$16,908.85

$32,544.67

NPV=

-$21,531.78

 

 

 

 

 

Hence Incremental Cash Flows are:

 Year ->

0

1

2

3

4

5

Net Cash Flow

-$110,667.20

$27,466.88

$22,080.13

$18,848.08

$16,908.85

$32,544.67

Net Present Value = -$21,531.78

IRR Calculation:

0 = -$110,667.20 + $27,466.88/(1+r) + $22,080.13/(1+r)^2 + $18,848.08/(1+r)^3 + $16,908.85/(1+r)^4 + $32,544.67/(1+r)^5

By Hit and Trial

NPV at r as 2% = 342.68

NPV at r as 3% = -2842.4

Hence r = 2% +342.68/(342.68+2842.4) = 2.11%

Thus IRR = 2.11%

The president of Cook Airlines has asked you to evaluate the proposed acquisition of a new jet. The jet’s price is $40 million, and it is depreciable @ 20% WDV. The purchase of the jet would require an increase in net working capital of $200,000.The jet would increase the firm’s before-tax revenues by $20 million per year but would also increase operating costs by $5 million per year. The jet is expected to be used for three years and then sold for $25 million. The firm’s marginal tax rate is 40%. Compute the following:

Net incremental cash flows for the project

Compute the NPV and IRR of the project for project acceptance at 10% hurdle

Given Data

Price

$40,000,000.00

Depreciation

20%

Life

3

Salvage Value

$25,000,000.00

Marginal Tax Rate

30.00%

Book Value of Jet after 3 years

=

$20,480,000.00

Capital Gains

=

$4,520,000.00

Capital Gains Tax

=

$1,356,000.00

Calculation For Depreciation:

Year

1

2

3

Depreciation

$8,000,000.00

$6,400,000.00

$5,120,000.00

Calculations

Year

0

1

2

3

Revenue

$0.00

$20,000,000.00

$20,000,000.00

$20,000,000.00

Cost

$0.00

$5,000,000.00

$5,000,000.00

$5,000,000.00

EBITDA

$0.00

$15,000,000.00

$15,000,000.00

$15,000,000.00

Depreciation

$0.00

$8,000,000.00

$6,400,000.00

$5,120,000.00

EBIT

$0.00

$7,000,000.00

$8,600,000.00

$9,880,000.00

Tax

$0.00

$2,100,000.00

$2,580,000.00

$2,964,000.00

PAT

$0.00

$4,900,000.00

$6,020,000.00

$6,916,000.00

Add Back Depreciation

$0.00

$8,000,000.00

$6,400,000.00

$5,120,000.00

CAPEX

-$40,000,000.00

$0.00

$0.00

$0.00

Increase in Working Capital

$200,000.00

$0.00

$0.00

-$200,000.00

Salvage Value

$0.00

 

 

$25,000,000.00

Capital GainsTax

 

 

 

$1,356,000.00

Net Cash Flow (PAT+Dep+CAPEX+Salvage Value-CGT-Inc in Work Capital)

-$40,200,000.00

$12,900,000.00

$12,420,000.00

$35,880,000.00

NPV

$8,748,910.59

 

 

 

Hencre Incremental Cash Flows are:

 Year ->

0

1

2

3

Net Cash Flow

-$40,200,000.00

$12,900,000.00

$12,420,000.00

$35,880,000.00

Net Present Value = $8,598,647.63

IRR Calculation:

0 = -40,200,000.00 + 12,900,000.00/(1+r) + 12,420,000.00/(1+r)^2 + 35,880,000.00/(1+r)^3

By Hit and Trial

NPV at r as 20% = -61111.11

NPV at r as 19% = 702662.60

r = 19% + 702662.60/(61111.11+702662.60) = 19.92%

Hence IRR = 19.92%