Question: Adley & Isaac General Hospital is thinking about purchasing a new machine. The new machine would cost $200,000 with an additional $25,000 for installation of the machine. The machine will have a life of 5 years and will be depreciated using the straight line method. The machine can be sold for $15,000 at the end of its life. This machine is expected to produce cost savings of $40,000 the first three years and $60,000 per year after. It will take a $10,000 adjustment to net working capital if the machine is purchased. The company has a required return of 6% and is in the 35% tax bracket. Calculate the NPV of the project and determine if the company should purchase the machine.
|
Year
|
1
|
2
|
3
|
4
|
5
|
|
Cost Savings
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
EBIT
|
|
|
|
|
|
|
Taxes
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
OCF
|
|
|
|
|
|
|
Change in NWC
|
|
|
|
|
|
|
Capital Investment
|
|
|
|
|
|
|
Net CF
|
|
|
|
|
|