A widget machine will cost $480,000. The anticipated increase in revenue will be $140,000/year for 5-years. Annual expenses will be $30,000/year for 5-years. The depreciable life is estimated to be 5-years and the salvage value will equal $35,000. Additional inventory necessary to run the machine will be $26,000. Initial training expenses are $20,000. Tax rate equals 40%. Question 1 solved below - Find the NPV@10%.

Solve for question 2- Find the IRR and question 3- Find the discounted payback and convert this into a percentage.

Solution:

Solving part 1 of the question as per chegg's guidelines:

a)Calculation of NPV

Cash out flows at year 0=Cost of machine+Initial Training expense+Additional working capital

=$480,000+$20,000+$26,000=$526,000

Annual depreciation=Cost of machine-Salvage value/life

=$480,000-$30,000/5=$90,000

Annual after tax cash inflows=(Revenue-Expenses)(1-tax rate)+Depreciation*tax rate)

=($140,000-$30,000)(1-0.40)+$90,000*40%

=$66,000+$54,000=$102,000

Present value of after tax cash inflows=Annual after tax cash inflows*Present value annuity factor @10% for 5 years+Salvage value*Present value interest factor @10% for 5 years

=$102,000*3.790787+$30,000*0.620921

=$405,287.90

Net Present value=Present value of after tax cash inflows-Cash out flows at year 0

=$405,287.90-$526,000

=-$120,712.10