This problem is taken from "Study Guide for Brigham/Houston's

The Board of Directors of National Brewing Inc. is considering the acquisition of a new still. The still is priced at $600,000 but would require Fundamentals of Financial Management, 13th Edition, 2012
$60,000 in transportation costs and $40,000 for installation. The still has useful life of 10 years but will be depreciated over its 5 year MACRS by Eugene F. Brigham and Joel F. Houston". This Model is
life. It is expected to have a salvage value of $10,000 at the end of 10 years. The still would increase revenues by $120,000 per year and prepared by Rajib Dahal. If you need excelsheet calculation,
increase in yearly operating costs by $20,000 per year. Additionally, the still would require a $30,000 increase in net working capital. The please contact me at my email at
marginal tax rate is 40 percent, and the project’s cost of capital is 10 percent. What is the NPV of the still? rajib.dahal@nu.edu.kz/rajib.dahal@gmail.com
Chapter-11: Solutions
Assumptions
Capex(incl. Transportation and installation costs) 700,000.00 Depreciation Schedule
Salvage Value(at the end of 10 years) 10,000.00 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Annual Net increase in revenue(after adjusting
increase in operating costs) 100,000.00 20% 32% 19% 12% 11% 6%
Increase in Net Working Capital 30,000.00 140,000.00 224,000.00 133,000.00 84,000.00 77,000.00 42,000.00
Tax Rate 40%
Discount Rate 10%
Discounted Cash Flow Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
0 1 2 3 4 5 6 7 8 9 10
Incremental revenue 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000
D&A 140,000 224,000 133,000 84,000 77,000 42,000 0 0 0 0
Salvage Value 10,000.00
Gain from Salvage Value 10,000.00
Cashflow before taxation (40,000) (124,000) (33,000) 16,000 23,000 58,000 100,000 100,000 100,000 110,000
Taxation (16,000) (49,600) (13,200) 6,400 9,200 23,200 40,000 40,000 40,000 44,000
Cash flows after taxation (24,000) (74,400) (19,800) 9,600 13,800 34,800 60,000 60,000 60,000 66,000
Add:D&A 140,000 224,000 133,000 84,000 77,000 42,000 0 0 0 0
Add: Capex (700,000)
Add: Change in Net Working Capital (30,000) 30,000
Transaction Cashflow (730,000) 116,000 149,600 113,200 93,600 90,800 76,800 60,000 60,000 60,000 96,000
Discount Factor 1.000 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386
DCF (730,000) 105,455 123,636 85,049 63,930 56,380 43,352 30,789 27,990 25,446 37,012
NPV (130,961)