This should be calculated on Excel using Solver, to have an NPV of 0. The reason this is the best method is because the purchase cost impacts the tax expense, as a result of the depreciation tax credit. That means that six total elements of the equation are unknown, but all are related to the original purchase cost.
The maximum that Kerry would purchase the machine for, therefore, would be $46,277. If the machine cost more, the net present value would be below zero.
d
0.18
Year
0
1
2
3
4
5
Purchase Cost
-46277.05481
Added Fixed Costs
-2500
-2500
-2500
-2500
-2500
Added VC
-18250
-18250
-18250
-18250
-18250
Added Revenue
54750
54750
54750
54750
54750
Tax on Revenue
-16425
-16425
-16425
-16425
-16425
Dep Exp Credit
-2776.62
-2776.623
-2776.62
-2776.62
-2776.62
Sum of Flows
-46277.05481
14798.38
14798.38
14798.38
14798.38
14798.38
PV
-46277.05481
12541
10627.96
NPV
$ (0.00)
12. a. To calculate nominal cash flows, the inflation rate would not be considered. The discount rate, however, should include...
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