CMA Study Group

calculation of NPV

  • 1.  calculation of NPV

    Posted 13 days ago

    Hi all,

    Can you explain step by step how to calculate the NPV for both the investments options given below.


    Nittany Co. is considering purchasing one of the two different machines for their factory. Both machines would be used to introduce a new product to Nittany's already diversified product line. There is, however, great disagreement among management as to which of the projects should be invested in by Nittany. There are only enough funds for one of the following projects to be invested in. You have been hired as a consultant to assist management in making a decision as to which of these two machines should be purchased.

    Information about the 2 machines is below:



    Machine 1  Machine 2
    Initial Cost$100,000  $200,000   
    Transportation & Installation   $ 20,000  

    $40,000


    Estimated Salvage Value $10,000  

    $90,000


    Expected Useful Life5 years  

    8 years


    Tax Depreciation MethodStraight-Line*

    Straight Line*


    Estimated increased revenues each period  $30,000  

    $52,000


    Estimated Cost Savings each period  $20,000     

    $ 6,000


    Investment in Working Capital at the beginning of the project & $4,000 at the end of the year 4



    $16,000   $8,000


    * In the calculation of tax depreciation expense, the salvage value of the machine is not taken into account and the entire initial cost of the asset will be depreciated over the useful life of the asset.


    The cost of capital for Nittany is 10% and Nittany generally does not invest in any project that does not return at least 12%. Nittany's tax rate is 30%.


    Thank you



  • 2.  RE: calculation of NPV

    Posted 12 days ago





    From this we can come to a conclusion that Machine 1 is having the least Payback period and Better NPV at the end of 4Th Year.




    ------------------------------
    Mohammed Nadeem
    Accountant
    Vi Sigma Apparel Group FZE
    Abu Dhabi
    United Arab Emirates
    ------------------------------



  • 3.  RE: calculation of NPV

    Posted 12 days ago
      |   view attached

    Dear Members,

    Could you check my calculation attached.

     

    Best regards,

    Mohammed Adly

    Head of Accounting Dept.&Deputy Admin Manager

     

    Mob.: +966 59 016 2368 & +201023776570

    mohammed.adly@...

     

    Stefan Auer Shading Structures Company

    P. O. Box 10680, Jeddah 21443, KSA, Tel: +96612 606-4663, www.sae-saudi.com

    ********Legal Disclaimer********                                                        

    Legal Disclaimer : The information in this message is confidential and may be legally privileged. It is intended solely for the addressee. Access to this message by anyone else is unauthorized. If you are not the intended recipient, any disclosure, copying, or distribution of the message, or any action or omission taken by you in reliance on it, is prohibited and may be unlawful. Please immediately contact the sender if you have received this message in error.

     




    Attachment(s)

    xlsx
    NPV.xlsx   12 KB 1 version


  • 4.  RE: calculation of NPV

    Posted 8 days ago

    Why we are not considering salvage value at the end of useful life?. In this question they directly given salvage value and we consider it as last years salvage value.

    For depreciation calculation we are not deducting any salvage value , that means there is no book value at the end of the life. So salvage value given in this question is completely taken as gain on sale [(Salvage value - BV)*.70]. That means I think in last years we need to add after tax salvage value in our calculation.



    ------------------------------
    Dony Francis
    Student
    Erumely
    India
    ------------------------------



  • 5.  RE: calculation of NPV

    Posted 7 days ago
    @Dony Francis But no where it is given that at what fair value the asset will be sold at. Then, how can we calculate gain or loss on sale of the asset? Disposal value/ Market Value/ Fair value is required to calculate the tax on gain or loss of the asset.​

    ------------------------------
    Nupur Mahajan
    nupur1188@...
    Hartford CT United States
    ------------------------------



  • 6.  RE: calculation of NPV

    Posted 7 days ago
    Hello,

    If you want to determine whether the investment exceeds the required return of 12%, I think we have to compare the FV of cash inflow, within the FV of the investment @ 12%. It means to compare these two parts (for machine 1):

    Undiscounted cash flow: 42,200 x 1.12^3 + 42,200 x 1.12^2 + 42,200 x 1.12 + 58,200 = $217,687.64
    FV of the investment​: 124,000 x 1.12^4 (12% annually in 4 years) = $195,116.40

    This showed that even machine 1 is qualified.
    Did you spot any flaw in my thinking? I appreciate your feedback.
    Thanks,

    Kyle

    ------------------------------
    Kien Nguyen
    Unemployed
    Ottawa ON
    Canada
    ------------------------------



  • 7.  RE: calculation of NPV

    Posted 7 days ago
    @Mohammed Nadeem Sir, I think you have not read the line "Investment in Working Capital at the beginning of the project & $4,000 at the end of the year 4​" - I believe This means that initial working capital investment is $16,000 in machine 1 and $8,000 in machine 2, which is followed by $4000 in year 4 individually for both of the machines. Why are you directly using $4,000 only in WC in the initial calculations?​

    ------------------------------
    Nupur Mahajan
    nupur1188@...
    Hartford CT United States
    ------------------------------



  • 8.  RE: calculation of NPV

    Posted 6 days ago
      |   view attached
    Hello every one,

    I have already answered this question and posted it here. anyhow, please find my answer on attached excel file. you can check the formulas to be understandable.
    for any inquiry just mail me or reach me on 00966590162368
    kind regards,,​

    ------------------------------
    Mohamed Aly
    Chief Financial Officer
    Jeddah
    Saudi Arabia
    ------------------------------

    Attachment(s)

    xlsx
    NPV.xlsx   15 KB 1 version


  • 9.  RE: calculation of NPV

    Posted 6 days ago
    What is the treatment of $10,000 salvage value? Tax @30%

    Investopedia defines salvage value as Salvage value is the estimated resale value of an asset at the end of its useful life. So definitely, this should be included in our analysis.

    Can anyone validate my calculations?

    Salvage value = $10,000
    Book value = 0, as the asset is fully depreciated

    Sale of asset= $10,000

    Gain on sale of asset = $10,000-$0

    Tax on gain on sale of asset = 30% of 10,000 = $3,000

    The un-discounted cash inflow from the salvage value of the asset = $10,000-$3,000 = $7,000



    ------------------------------
    Nupur Mahajan
    nupur1188@...
    Hartford CT United States
    ------------------------------