Question

Shanks Corporation is considering a capital budgeting project that inolves investiong &600.00 in equipment that would have a useful life of 3 years and zerp salvege value. The company would also need invest $20.000 immediately in working capital which be released for use elesewhere at the end of the project in 3 years. The net annual operationg cash inflow, which in the difference between the incremental sales revenue and incremental cash operationg expenses, would be $300.000 per year. The project would require a one-time renovation expenses of $60.000 at the end of year 2. The company uses straight- line depreciation and the depreciation expenses on the equipment would be $200.000 per year. Assme cash flow occur at the end of the year expect for the initial investment. The company takes income taxes into account in its capital budgetiong. The income tax rate is 35%. The after-tax discount rate is 15%.

Required:

Determine the net present value of the project. Show all your work.

Answer 1

		Years
		0	1	2	3	NPV
Purchase of equipment	A	-600000
Investment in working capital	B	-20000			20000
Incremental revenue over cash expenses	C		300000	300000	300000
Less: Overhaul of equipment year 2	D			-60000
Less: Depreciation	E		-200000	-200000	-200000
Net Income before tax	F = C-D-E		100000	40000	100000
Less: Tax at 35%	G = F x 35%		35000	14000	35000
Net income after tax	H = F-G		65000	26000	65000
Add back depreciation	I		200000	200000	200000
NOPAT	J = H+I		265000	226000	265000
Total Cash Flows	K = A+B+J	-620000	265000	226000	285000
PVF at 15%		1	0.869565	0.756144	0.657516
Present Value		-620000	230434.8	170888.5	187392.1	$ (31,284.62)