Axa is replacing an old, fully depreciated extractor with a more efficient machine that will cost $265,000. The new extractor will be depreciated as a 7-year MACRS asset. With the more efficient production, Axa expects annual revenues to increase by $80,000, and annual operating expenses to increase by $25,000. If Axa expects to sell the machine at the beginning of year 6 for $40,000, determine the NPV of this project. Assume the firm's marginal tax rate is 40% and that the firm's cost of capital is 10%. Use the depreciation schedule listed below:
(7-Yr Dep. Schedule: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, 4.46%)
A) -$46,283
B) -$42,855
C) -$40,773
D) -$38,105

Question

Quizplus · Accepted Answer

Solution:
 11ea10f6_a150_6076_b6b3_d90120624ac5_TB2040_00 
Book value = $265,000 - $205,881 = $59,119
Loss on sale = $59,119 - $40,000 = $19,119
Tax savings on loss = $19,119(0.4) = $7,648
NPV = $-265,000 + $48,148(0.909) + $58,960(0.826) + $51,540(0.751) + $46,240(0.683) +$90,114(0.621) = -$46,283

Axa Is Replacing an Old, Fully Depreciated Extractor with a More