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Firm A needs to purchase a new machine. If the machine is purchased, it will replace
an old machine purchased 10 years ago for €105,000 and which is being depreciated
on a straight line basis to a zero salvage value (15-year depreciable life). The old
machine can be sold for €60,000. The new machine will cost €200,000 installed and
will be depreciated using the following rate of 20, 32, 19, 12, and 11%; it will be sold
for €16,000 at the end of 5th year. The firm expects to be able to reduce net
working capital by €5,000 when the machine is installed, but required working capital
will return to the original level when the machine is sold after 5 years. Also, the firm
expects to increase its revenue by €20,000 per year if the new machine is
purchased, but cash expenses will also increase by €4,500 per year. If the firm’s cost
of capital is 10 percent and its tax rate is 20 percent what is the NPV of the project?

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