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A 5-yr project has an initial requirement of $100,415 for new equipment and $8,944 for net...

A 5-yr project has an initial requirement of $100,415 for new equipment and $8,944 for net working capital. The fixed assets will be depreciated to a zero book value over 5 years and have an estimated salvage value of $23,294. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $69,509. The cost of capital is 8% and the tax rate is 29%. What is the net present value of the project?

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Answer #1

Initial investment = Costs + increase in NWC

Initial investment = 100,415 + 8,944

Initial investment = $109,359

Annual operating cash flow =  69,509

Year 5 non operating cash flow = Market value + NWC - tax(market value - book value)

Year 5 non operating cash flow = 23,294 + 8,944 - 0.29(23,294 - 0)

Year 5 non operating cash flow = 23,294 + 8,944 - 6,755.26

Year 5 non operating cash flow = 25,482.74

NPV = Present value of cash inflows - present value of cash outflows

NPV = -109,359 + 69,509 / (1 + 0.08)1 + 69,509 / (1 + 0.08)2 + 69,509 / (1 + 0.08)3 + 69,509 / (1 + 0.08)4 + 69,509 / (1 + 0.08)5 + 25,482.74 / (1 + 0.08)5

NPV = $185,513.41

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