# Question & Answer: Natchez, Inc. is considering the purchase of a new machine costing \$200,000. The company will incur \$5,000 per year in cash operating expenses but it will all…..

Natchez, Inc. is considering the purchase of a new machine costing \$200,000. The company will incur \$5,000 per year in cash operating expenses but it will allow the company to earn an additional \$100,000 per year in revenues. Natchez expects the machine to provide future benefits for 3 years and salvage value at the end of the 3-year period to be \$10,000. The company uses straight-line depreciation method. The income tax rate is 30%. If the required rate of return is 10%, how much is the net present value of this project? Select one: a. \$12, 629 b. None of these answers are correct. c. \$43, 769 d. \$20, 143

Cost of Machine = \$200,000
Salvage Value = \$10,000
Useful Life of Machine = 3 years
Annual Operating Expenses = \$5,000
tax rate = 30%

Annual Depreciation = (Cost of Machine + Salvage Value) / Useful Life
Annual Depreciation = (\$200,000 + \$10,000) / 3
Annual Depreciation = \$70,000

Annual OCF = (Annual Income – Annual Expenses)*(1-tax) + tax*Annual Depreciation
Annual OCF = (\$100,000 – \$5,000)*(1-0.30) + 0.30*\$70,000
Annual OCF = \$87,500

Net Present Value = -\$200,000 + \$87,500*PVIFA(10%, 3) + \$10,000*PVIF(10%, 3)
Net Present Value = -\$200,000 + \$87,500*(1-(1/1.10)^3)/0.10 + \$10,000/1.10^3
Net Present Value = \$25,112.70