Question

Foley Systems is considering a new investment whose data are shown below. The equipment would have a zero salvage value, and would require $15,000 additional net operating working capital that would be recovered at the end of the project's life. Operating cash flows are expected to be constant over the project's life. What is the project's NPV?

(Hint: Cash flows from operations are constant in Years 1 to 3.)

W ACC 10.0%

Net investment in fixed assets (basis) $75,000

Net operating working capital $15,000

Operating cash flow $41,250

Tax rate 35%

Answer 1

Given : WACC = 10%

Net investment in fixed assets = $75000

Net operating working capital = $15000

Operating cashflow = $41,250

Tax rate = 35%

We need to calculate the operating free cashflow OFCF

OFCF = EBIT ( 1 - T) + depreciation - CAPEX - Working capital - any other asssets

OCFC = 41250 ( 1 - 0.35) - 15000 = $11,812.5 ( depreciation and CAPEX are included in operating cashflow caculation)

Now, NPV = OCFC / ( 1 + WACC)^t   where t is number of periods , t = 3 here

NPV = 11812.5 / ( 1+ 0.1)³ = $8,874.90

NPV of the project is $8,874.90