There is a machine that costs $550 today (year 0). Assume that this investment is fully tax-deductible, as stipulated by new US corporate tax code of 2018.
This company has current pre-tax profits from other projects that are greater than $550, so it can take full advantage of investment tax break above in year 0.
This machine will generate operating profits before depreciation (EBITDA) of $260 per year for 5 years. The first cash flow happens one year after this machine is installed (year 1).
Depreciation is not tax-deductible. Notice that you do not need to calculate depreciation at all to solve this problem since it has no effect on taxes.
Tax rate is 21%
There is no salvage value at the end of the 5 years (the machine is worthless), and no required working capital investment.
Discount rate is 6.5%.
Compute the NPV of the project.
Show all calculations.
NPV = __________________________?
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