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An airline is considering a project of replacement and upgrading of machinery that would improve efficiency. The new machinery costs $350 today and is expected to last for 5 years with no salvage value. Straight line depreciation will be used. Project inflows connected with the new machinery will begin in one year and are expected to be $300 each year for 5 years and project outflows will also begin in one year and are expected to be $135 each year for 5 years. The corporate tax rate is 36% and the required rate of return is 8%. Calculate the project's net present value.

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jepessoa

Answer:

$172.25

Explanation:

initial outlay for the project = -$350

cash flow years 1-5 = [($300 - $135 - $70) x (1 - 36%)] + $70 (depreciation expense) = $60.80 + $70 = $130.80

using an excel spreadsheet and the NPV function, we can calculate the project's NPV with an 8% discount rate:

=NPV(8%,130.80,130.80,130.80,130.80,130.80) - $350 = $522.25 - $350 = $172.25

we can also do it manually:

NPV = -$350 + $130.80/1.08 + $130.80/1.08² + $130.80/1.08³ + $130.80/1.08⁴ + $130.80/1.08⁵ = $172.25

The net present value of the project when the machine cost is $350 should be considered as the $172.25.

Calculation of the net present value:

Since the initial outlay for the project is -$350

And, the time period is 5 years

Also, the tax rate is 36%

The required rate of return is 8%.

Now

cash flow years 1-5

= [(One year cost - outflows - $70) * (1 - tax rate) + $70

= [($300 - $135 - $70) x (1 - 36%)] + $70

= $60.80 + $70

= $130.80

Now the NPV should be

= Machine cost + cash flow / (1 + required rate of return) + cash flow / (1 + required rate of return)^2 + cash flow / (1 + required rate of return)^3 + cash flow / (1 + required rate of return)^4 + + cash flow / (1 + required rate of return)^5

= -$350 + $130.80/1.08 + $130.80/1.08² + $130.80/1.08³ + $130.80/1.08⁴ + $130.80/1.08⁵

= $172.25

hence, The net present value of the project should be considered as the $172.25.

Learn more about net present value here: https://brainly.com/question/24334808

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