Homework SourseJohnson Co is considering replacing an existing piece of equ
Johnson Co. is considering replacing an existing piece of equipment. The project involves the following:
The new equipment will have a cost of $600,000 and it will be depreciated on a straight-line basis over a period of six years (Year 1-6)
Solution
All the answer given in the question are incorrect
The correct NPV of this project is 497057.70$
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Initial Investment | 600000 | ||||||
| EBIT | 400000 | 400000 | 400000 | 400000 | 400000 | 400000 | |
| ( Taxes ) @40% | -160000 | -160000 | -160000 | -160000 | -160000 | -160000 | |
| New Dep | 100000 | 100000 | 100000 | 100000 | 100000 | 100000 | |
| ( old Dep ) | -50000 | -50000 | -50000 | -50000 | |||
| Salvage Value | 300000 | ||||||
| ( Tax on Salvage ) | -120000 | ||||||
| ( NWC ) | -45000 | ||||||
| Recapture of NWC | 45000 | ||||||
| TOTAL FREE CF | 735000 | 290000 | 290000 | 290000 | 290000 | 340000 | 385000 |
| PVF @ 13% | 1.000 | 0.885 | 0.783 | 0.693 | 0.613 | 0.543 | 0.480 |
| Present Value | 735000 | 256637.17 | 227112.54 | 200984.55 | 177862.43 | 184538.38 | 184922.63 |
| NPV | = | 497057.70 |
