# CMA Study Group

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## 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 Life 5 years 8 years Tax Depreciation Method Straight-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.

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Accountant
Vi Sigma Apparel Group FZE
Abu Dhabi
United Arab Emirates
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• #### 3.  RE: calculation of NPV

Posted 12 days ago

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

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Attachment(s)

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.

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Dony Francis
Student
Erumely
India
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• #### 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.​

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Nupur Mahajan
nupur1188@...
Hartford CT United States
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• #### 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

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Kien Nguyen
Unemployed
Ottawa ON
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• #### 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?​

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Nupur Mahajan
nupur1188@...
Hartford CT United States
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• #### 8.  RE: calculation of NPV

Posted 6 days ago
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,,​

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Mohamed Aly
Chief Financial Officer
Jeddah
Saudi Arabia
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Attachment(s)

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

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Nupur Mahajan
nupur1188@...
Hartford CT United States
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