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NEW CMA PART 2 - Not getting correct NPV answer

  • 1.  NEW CMA PART 2 - Not getting correct NPV answer

    Posted 05-07-2011 09:56 AM

    Lunar Inc. is considering the purchase of a machine for $500,000 which will last 5 years. A financial analysis is being developed using the following information.

      Year 1 Year 2 Year 3 Year 4 Year 5
               
    Unit Sales 10000 10000 20000 20000 20000
               
    Selling price/ unit 100 100 100 100 100
    Variable cost/unit 65 65 65 65 65
    Fixed cost 300000 300000 300000 300000 300000
    Pre-tax cash flow 50000 50000 400000 400000 400000

    

    The machine will be depreciated over 5 years on a straight-line basis for tax purposes and Lunar is subject to a 40% effective income tax rate. Assuming Lunar will have significant taxable income from other lines of business, and using a 20% discount rate, the net present value of the project would be

    a. $(282,470).

    b. $(103,070).

    c. $(14,010).

    d. $16,530.

    Correct answr is : D. 16530

    

    My answer :

    Yearly cash flows for 1-2 and 3-5 years are:

      Yrs  Yrs
      1-2  3-5
    Yrly cash flow 50 400
    Less : Dep -100 -100
      -50 300
    Less : Tax@ 40% -20 -120
      -70 180
    Add: Dep 100 100
      30 280

    

    After discounting at 20%  above cash inflows for 1-2 , 3-5 years considering initial investment of 500 K  Ã¯Â»Â¿, I get answer of 44563.

    Where am I going wrong?

    



  • 2.  Re: NEW CMA PART 2 - Not getting correct NPV answer

    Posted 05-07-2011 11:25 AM
      |   view attached

    Hi anil.

     

    Please see the attached file

    Attachment(s)

    xlsx
    lunar.xlsx   10 KB 1 version


  • 3.  Re: NEW CMA PART 2 - Not getting correct NPV answer

    Posted 05-09-2011 04:40 AM

    Thanks Ronald Materiz.