стр. 112 |

Thus, the infinite horizon NPVs are as follows:

Infinite horizon NPVx = $862.7710.10 = $8,627.70

Infinite horizon NPVY = $926.3310.10 = $9,263.30

Abandonment. Henteleff, Inc. is considering a project with the following data:

8223

,

Abandonment

Initial Investment

and Net Cash Flow Value in Year t

Year

$8,000

($8,OOo)

0

4,500

1 4,000

2 4,000 3,000

0

3 4,000

The firmвЂ™s cost of capital is 10 percent. What should the company do?

SOLUTION

We will compute NPVs in three cases.

Case 1. NPV of the project if kept for 3 years

PV - I = $4,OOO PVIFAlo,3 = $4,000(2.4869) - $8,000

NPV =

= $1,947.60

NPV of the project if abandoned after Year 1

Case 2.

NPV = PV - I = $4,000 PVIFlo,l+ $4,500 PVIFlo,2- $8,000

= $4,000(0.9091) + $4,500(0.9091) - $8,000

= $3,636.40 + $4,090.95 - $8,000 = -$272.65

Case 3. NPV of the project if abandoned after Year 2

NPV = PV - I = $4,0o0 PVIFlo,l+ $4,000 PVIFlo,2+ $3,000 PVIFlo,z - $8,000

= $4,000(0.9091) + $4,000(0.8264) + $3,000(0.8264)- $8,000

= $3,636.40 + $3,305.60 + $2,479.20 - $8,000 = $1,421.20

The company should keep the project for 3 years.

NPV Analysis. Two new machines are being evaluated for possible purchase. Forecasts related

8.24

to the machines are:

Machine 2

Machine 1

$50,000

Purchased price $60,000

4 years

4 years

Estimated life (s traight-line depreciation)

None

None

Estimated scrap value

Annual cash benefits before income tax:

$25,000 $45,000

Year 1

25,000 19,000

Year 2

25,000

25,000

Year 3

25,000

Year 4 25,000

Income tax rate 40% 40%

Compute the net present value of each machine. Assume a cost of capital of 8%.

239

CAPITAL BUDGETING (INCLUDING LEASING)

CHAP. 81

SOLUTl0N

After-tax cash benefit:

˜˜˜˜˜˜˜˜˜˜

Net

Cash Income AftefiTax

Benefit Taxable Tax Cash Inflow

Year (a) Depreciation Income (a)-(b)

(b)

$5,000

$12,500 $20,000

$25,000

1 $12,500

5,000 20,000

12,500

2 25,000 12,500

5,000

12,500 20,000

12,500

3 25,000

12,500

4 25,000 5,000 20,000

12,500

I Machine 2

$15,000

$45,000

1 $30,000 $12,000 $33,000

2 19,000 15,000 4,000 1,600 17,400

3 25,OOO 15,000 4,000 21,000

10,000

4,000 21,000

10,000

4 25,OOO 15,000

Net present value:

I Present Value of $1

Cash (Outtlow) Net Present Value

of Cash Flow

Year 8 Percent

Inflow

I Machine 1

20,000 3.312 66,240

Net present value $ 16,240

I Machine 2

$(60,ooq

0 $(60,000)

1.000

33,000 30,558

0.926

1

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