Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $7,200 and sell its old washer for $2,500. The new washer will last for 6 years and save $1,700 a year in expenses. The opportunity cost of capital is 15%, and the firm’s tax rate is 21%. a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.)b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.)c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Question
Asked Nov 8, 2019

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $7,200 and sell its old washer for $2,500. The new washer will last for 6 years and save $1,700 a year in expenses. The opportunity cost of capital is 15%, and the firm’s tax rate is 21%.

 

a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.)

b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

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Step 1

a.

Calculate the cash flows from year 0 to 6 as follows:

C
D
F
G
Particulars
Year 0
Year
Year 2
Year 3
Year 4
Year 5
Year 6
(7,200.00)
2 Purchase cost of new washer
1.975.00
Add: After-tax cost of old waster
3
4
5 Pre-cost savings
6 Less: Depreciation
7 Earnings before interst and tax
8 Less: Tax@219%
1,700.00
1,700.00
1,700.00
1,700.00
1,700.00
1,700.00
1,200.00
1,200.00
1,200.00
1,200.00
1,200.00
1200.00
500.00
500.00
500,00
500.00
500.00
500.00
105.00
105.00
105.00
105.00
105.00
105.00
395.00
9 Net income
395.00
395.00
395.00
395.00
395.00
1,200.00
1,200.00
1.595.00
10 Add: Depreciation
,200.00
1,200,00
1,200.00
1,200.00
11 Operating cash flows
(5.225.00)
1,595.00
1,595.00
1.595.00
1,595.00
1,595.00
A
B
C
D
E
G
H
Particulars
Year 1
Year 2
Year 3
Year 0
Year 4
Year 5
Year 6
1
-7200
2500* ( 1-21 % )
Purchase cost of new washer
2
Add After-tax cost of old waster
3
4
1700
1700
- 7200 / 6
1700
= 7200 6
E5-E6
E7*21%
=E7-ES
-E6
1700
1700
- 7200/6
G5-G6
G7*21 %
G7-G8
-G6
1700
= 7200/6
- H5 - H6
H7*21%
- H7-H8
H6
5 Pre-cost savings
6 Less: Depreciation
7 Earnings before interst and tax
8 Less: Tax @ 21 %
9 Net income
10 Add Depreciation
11 Operating cash flows
- 7200 6
= 7200 6
=F5-F6
-C5-C6
=D5-D6
-D7*21%
-D7 - D8
-D6
C7*21 %
F7*21%
-C7 - C8
-C6
-F7-F8
=F6
=SUM(B2B10)-SUM(C9:C10)SUMD9D10)-SUM(E9E10)=SUM(F9F10 )|=SUM(G9:G10)| =SUM(H9 H10)
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C D F G Particulars Year 0 Year Year 2 Year 3 Year 4 Year 5 Year 6 (7,200.00) 2 Purchase cost of new washer 1.975.00 Add: After-tax cost of old waster 3 4 5 Pre-cost savings 6 Less: Depreciation 7 Earnings before interst and tax 8 Less: Tax@219% 1,700.00 1,700.00 1,700.00 1,700.00 1,700.00 1,700.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1200.00 500.00 500.00 500,00 500.00 500.00 500.00 105.00 105.00 105.00 105.00 105.00 105.00 395.00 9 Net income 395.00 395.00 395.00 395.00 395.00 1,200.00 1,200.00 1.595.00 10 Add: Depreciation ,200.00 1,200,00 1,200.00 1,200.00 11 Operating cash flows (5.225.00) 1,595.00 1,595.00 1.595.00 1,595.00 1,595.00 A B C D E G H Particulars Year 1 Year 2 Year 3 Year 0 Year 4 Year 5 Year 6 1 -7200 2500* ( 1-21 % ) Purchase cost of new washer 2 Add After-tax cost of old waster 3 4 1700 1700 - 7200 / 6 1700 = 7200 6 E5-E6 E7*21% =E7-ES -E6 1700 1700 - 7200/6 G5-G6 G7*21 % G7-G8 -G6 1700 = 7200/6 - H5 - H6 H7*21% - H7-H8 H6 5 Pre-cost savings 6 Less: Depreciation 7 Earnings before interst and tax 8 Less: Tax @ 21 % 9 Net income 10 Add Depreciation 11 Operating cash flows - 7200 6 = 7200 6 =F5-F6 -C5-C6 =D5-D6 -D7*21% -D7 - D8 -D6 C7*21 % F7*21% -C7 - C8 -C6 -F7-F8 =F6 =SUM(B2B10)-SUM(C9:C10)SUMD9D10)-SUM(E9E10)=SUM(F9F10 )|=SUM(G9:G10)| =SUM(H9 H10)

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Step 2

b.

Calculate the net present val...

B
D
G
H
Year 2
Particulars
Year 0
Year 1
Year 3
Year 4
Year 5
Year 6
1
(7,200.00)
1,975.00
2 Purchase cost of new washer
3 Add After-tax cost of old waster
4
5 Pre-cost savings
6 Less: Depreciation
7 Earnings before interst and tax
8 Less: Tax @ 21%
9 Net income
1.700.00
1,700.00
1.700,00
1,700.00
1,700.00
1.200.00
1,700.00
1,200.00
1.200.00
1,200.00
1,200.00
1200.00
500.00
500.00
500.00
500.00
500.00
500.00
105.00
105.00
105.00
105.00
105.00
105.00
395.00
1,200.00
1.595.00
395.00
395.00
395.00
395.00
395.00
1,200.00
10 Add Depreciation
1,200.00
1,595.00
1,200.00
1.200.00
1,200.00
11 Operating cash flows
12 PV factors@ 15%
(5,225.00)
1,595.00
0.869565217391304 0.756143667296787 0.657516232431988 0.571753245593033 0497176735298290 0432327595911556
1,048.74
1,595.00
1,595.00
1,595.00
1
(5,225.00)
13 Present value
1,386.96
1,206.05
911.95
793.00
689.56
Net Present Value
811.25
14
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B D G H Year 2 Particulars Year 0 Year 1 Year 3 Year 4 Year 5 Year 6 1 (7,200.00) 1,975.00 2 Purchase cost of new washer 3 Add After-tax cost of old waster 4 5 Pre-cost savings 6 Less: Depreciation 7 Earnings before interst and tax 8 Less: Tax @ 21% 9 Net income 1.700.00 1,700.00 1.700,00 1,700.00 1,700.00 1.200.00 1,700.00 1,200.00 1.200.00 1,200.00 1,200.00 1200.00 500.00 500.00 500.00 500.00 500.00 500.00 105.00 105.00 105.00 105.00 105.00 105.00 395.00 1,200.00 1.595.00 395.00 395.00 395.00 395.00 395.00 1,200.00 10 Add Depreciation 1,200.00 1,595.00 1,200.00 1.200.00 1,200.00 11 Operating cash flows 12 PV factors@ 15% (5,225.00) 1,595.00 0.869565217391304 0.756143667296787 0.657516232431988 0.571753245593033 0497176735298290 0432327595911556 1,048.74 1,595.00 1,595.00 1,595.00 1 (5,225.00) 13 Present value 1,386.96 1,206.05 911.95 793.00 689.56 Net Present Value 811.25 14

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