Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $7,200 and sell its old washer for $2,500. The new washer will last for 6 years and save $1,700 a year in expenses. The opportunity cost of capital is 15%, and the firm’s tax rate is 40%.

a. If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 0 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amount should be indicated by a minus sign.)

b. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation:

a.

Cost of new washer = $ 7,200

After tax sales value of old washer = $ 2,500 – ($ 2,500 x 0.4)

= $ 2,500 x 0.6 = $ 1,500

Initial investment = Cost of new washer - After tax sales value of old washer

= $ 7,200 - $ 1,500 = $ 5,700

Straight line annual depreciation of washer = Purchase cost/useful life

= $ 7,200/6 = $ 1,200

Annual operating cash flow = (Revenue as cost savings) x (1 – tax rate) + (tax rate x Depreciation)

= $ 1,700 x (1 – 0.4) + (0.4 x $ 1,200)

= $ 1,700 x 0.6 + 0.4 x $ 1,200

= $ 1,020 + $ 480 = $1,500

Cash flow in year 0 is - $ 5,700.

Annual operating cash flow of the project in year 1 through 6 is $ 1,500

b.

NPV = C x PVIFA (i, n) – initial investment  

C = Annual cash flow = $ 1,500

i = Rate of interest = 15 %

n = No. of periods = 6

NPV = $ 15,000 x PVIFA (15 %, 6) - $ 5,700

= $ 15,000 x 3.7845 - $ 5,700  = $ 5,676.75 - $ 5,700

= - $ 23.25

NPV of the project is - $ 23.25

a manufacturer of printed circuit boards uses exponential smoothing with trend to forecast monthly demand of its product. at the end of december, the company wishes to forecast sales for january. the estimate of trend through november has been 200 additional boards sold per month. average sales have been around 1000 units per month. the demand for december was 1100 units. the company uses α = 0.20 and β = 0.10. make a forecast including trend for the month of january.

the answer is account d