Problem $1$

Your company is considering purchasing a machine now for $$1$ million. Because of this machine, the company would generate an additional $$1$ million in revenue in year $1,$ and each year after year $1,$ the revenue would grow by $3\%.$ However, there are some costs associated with the machine. Variable costs each year would be $70\%$ of revenue, and you would have to take depreciation expense using the straight$-$line method over five years to depreciate the total $$1$ million. Your company could dispose of the machine in year $5$ for $$100,000.$ The tax rate is $35\%,$ and the discount rate is $10\%.$

$1$

Year $1$ revenues

Revenue Growth

Disposal price

Tax Rate

Discount Rate

Var Cost $\%$

Life

Year

$0$

$1$

$2$

$3$

$4$

$5$

Inc. Revenues

Var Costs

Depreciation

Pre$-$tax income

Taxes

NOPAT

Add back Depr.

Initial investmet

Proceeds on disposal

Tax on disposal

Free Cash Flows

NPV