Making Capital Investment Decisions

Isaac, Inc. is thinking about purchasing a new machine. The new machine would cost $150,000 with an additional $30,000 for delivery of the machine. The machine will have a life of 5 years and will be depreciated using the straight line method. The machine can be sold for $25,000 at the end of its life. This machine is expected to produce cost savings of $35,000 the first two years and $50,000 per year after. It will take $10,000 in net working capital to maintain the machine. The company has a required return of 7% and is in the 35% tax bracket. Calculate the NPV of the project and determine if the company should purchase the machine.

Year 1 2 3 4 5Cost Savings 35,000 35,000 50,000 50,000 50,000Depreciation 31,000 31,000 31,000 31,000 31,000EBIT 4,000 4,000 19,000 19,000 19,000Taxes 1,400 1,400 6,650 6,650 6,650Net Income 2,600 2,600 12,350 12,350 12,350

OCF 33,600 33,600 43,350 43,350 43,350

Year 0 1 2 3 4 5OCF 33,600 33,600 43,350 43,350 43,350Change in NWC

-10,000 10,000

Capital Investment

-180,000 25,000

Net CF -190,000 33,600 33,600 43,350 43,350 78,350

Depreciation = (180,000 – 25,000) / 5 = 31,000

After Tax Salvage Value = 25,000 - .35(25,000 – 25,000)

NPV = -4,930.10

Do Not Accept Project