Answer:
- Annual operating cash flow of the project in year 1 through 6 is $ 1,500
- NPV of the project is - $ 23.25
Explanation:
a.
Cost of new washer = $ 7,200
After tax sales value of old washer = $ 2,500 – ($ 2,500 x 0.4)
= $ 2,500 x 0.6 = $ 1,500
Initial investment = Cost of new washer - After tax sales value of old washer
= $ 7,200 - $ 1,500 = $ 5,700
Straight line annual depreciation of washer = Purchase cost/useful life
= $ 7,200/6 = $ 1,200
Annual operating cash flow = (Revenue as cost savings) x (1 – tax rate) + (tax rate x Depreciation)
= $ 1,700 x (1 – 0.4) + (0.4 x $ 1,200)
= $ 1,700 x 0.6 + 0.4 x $ 1,200
= $ 1,020 + $ 480 = $1,500
Cash flow in year 0 is - $ 5,700.
Annual operating cash flow of the project in year 1 through 6 is $ 1,500
b.
NPV = C x PVIFA (i, n) – initial investment
C = Annual cash flow = $ 1,500
i = Rate of interest = 15 %
n = No. of periods = 6
NPV = $ 15,000 x PVIFA (15 %, 6) - $ 5,700
= $ 15,000 x 3.7845 - $ 5,700 = $ 5,676.75 - $ 5,700
= - $ 23.25
NPV of the project is - $ 23.25
