Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $823,200.00 work cell. Further, it will cost the firm $52,100.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $56,800.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,100.00. Finally, the firm will invest $10,800.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $917,000.00 with expenses estimated at 38.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 38.00%.

The work cell is estimated to have a market value of $462,000.00 at the end of the fourth year. The firm expects to reclaim 82.00% of the final NWC position.

The cost of capital is 12.00%.

What is the NPV the project if we end the project after 4 years?

Answer 1

To solve this question, we need to determine cash outflows at Year 0 and cash inflows for Year 1, 2, 3 & 4.

Cash outflows at Year 0 = $823,200 + $52,100 + $56,800 + $5,100 = $9,48,000

After determining cash outflows at the beginning of the project, we need to determine cash inflows for every year (please refer to the below table).

After computing cash inflows, calculate PV using formula =NPV(12%,C14:F14).

PV of cash inflows is $14,20,401.

NPV = PV of cash inflows - PV of cash outflows = $14,40,401 - $9,48,000 = $4,72,401.