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NPV Is Present Value of The Present Values of All Cash Inflows and Outflows From Particular Project

The Wessal Karim Corporation is considering installing a new conveyor system that would cost Rs. 85,000 initially and Rs. 6,000 to install. It would reduce annual labor costs by Rs. 17,000 and breakage costs by Rs. 600 per month. Electricity and maintenance costs would increase. The conveyor has an 8-year life and salvage value of Rs. 4,500. Calculating the net present value at 10% discount rate results in a positive NPV of Rs. 615. Therefore, the firm should buy the conveyor.

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203 views3 pages

NPV Is Present Value of The Present Values of All Cash Inflows and Outflows From Particular Project

The Wessal Karim Corporation is considering installing a new conveyor system that would cost Rs. 85,000 initially and Rs. 6,000 to install. It would reduce annual labor costs by Rs. 17,000 and breakage costs by Rs. 600 per month. Electricity and maintenance costs would increase. The conveyor has an 8-year life and salvage value of Rs. 4,500. Calculating the net present value at 10% discount rate results in a positive NPV of Rs. 615. Therefore, the firm should buy the conveyor.

Uploaded by

Humair Uddin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

NPV is present value of the present values of all cash inflows and outflows from particular project.

Q. 4. The Wessal Karim Corporation is considering installing a new conveyor for materials handling in a ware
house. The conveyor will have an initial cost of Rs. 85,000 and an installation cost of Rs. 6,000. Expected benefits
of the conveyor are: (a) Annual labor cost will be reduced by Rs. 17,000, and (b) breakage and other damages from
handling will be re

duced by Rs. 600 per month. Some of the firm’s costs are expected to increase as follows: (a) Electricity cost will
rise by Rs.200 per month, and (b) annual repair and maintenance of the conveyor will amount to Rs.999. Assume
the firm uses the MACRS rules for depreciation in the 5-year property class. No salvage value will be recognized
for tax purposes. The conveyor has an expected useful life of 8 years and a projected salvage value of Rs. 4,500.
The tax rate is 35 percent. (a) Estimate future cash inflows for the proposed project. (b) Determine the projects
NPV at 10 percent. Should the firm buy the conveyor?

Annual Labor cost reduced after tax deduction = Annual Labor cost * (1-Tax)

= 17000 (65%) =

Annual breakage reduced = 200 * 12 = 2,400*.65 = 1,560


Cash Flows
Years 0 1 2 3 4 5 6 7 8
Asset (91,000) 4,500
Labor Cost 17,000 17,000 17,000 17,000 17,000 17,000 17,000 17,000
Reduced
Tax Payment on (5,950) (5,950) (5,950) (5,950) (5,950) (5,950) (5,950) (5,950)
Cost Reduction
Annual breakage 7,200 7,200 7,200 7,200 7,200 7,200 7,200 7,200
reduced
Tax Paid on (2,520) (2,520) (2,520) (2,520) (2,520) (2,520) (2,520) (2,520)
Annual breakage
reduction
Annual 6,370 10,192 6,115 3,669 3,669 1,835 0 0
Depreciation
Tax
Benefit
Electricity Cost (2400) (2400) (2400) (2400) (2400) (2400) (2400) (2400)
Rise
Annual Repair (999) (999) (999) (999) (999) (999) (999) (999)
& Maintenance
Annual Net (91,000) 18,701 22,523 18,446 16,000 16,000 14,166 12,331 16,831
Cash Flows
Annual Discount 1 1.1 1.21 1.331 1.464 1.61 1.771 1.948 2.143
Factor
Annual (91,000) 17,000 18,614 13,858 10,928 9,034 7,998 6,330 7,853
Discounted Net
Cash Flows
Net Present 615 (It is positive net present value; the company must buy the machinery.
Value
Depreciation Using MACRS Method

Year Depreciatio Tax inflow


n 35 %
Rate
Defined In
MACRs h
0
1 20% 18,200 6,370
2 32% 29,120 10,192
3 19.2% 17,472 6,115
4 11.52% 10,483 3,669
5 11.52% 10,483 3,669
6 5.76% 5242 1,835
7 0
8 0
Total 91,000

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