Question

Consider the following 5-year project:
Cost of equipment = $500,000
- Additional shipping and installation cost = $15,000
- 10-year class life, straight line depreciation to zero
$20,000 in net working capital required at t=0.
- (All of this increase in NWC is recovered in year 5)
Revenues: $200,000 per year
Operating costs: $15,000 per year
Sell equipment at the end of year 5 for $300,000
Discount rate = 13%, marginal tax rate = 34%

1. Show Free CFs in: year 0, years 1-4, and year 5
2. Find NPV

Answer 1

Tax rate		34%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Total
Cost		$         515,000	$      515,000	$       515,000	$            515,000	$      515,000
Dep Rate= 1/10=10%		10.00%	10.00%	10.00%	10.00%	10.00%
Depreciation	Cost * Dep rate	$           51,500	$        51,500	$         51,500	$              51,500	$        51,500	$             257,500
Calculation of after-tax salvage value
Cost of machine			$      515,000
Depreciation			$      257,500
WDV	Cost less accumulated depreciation	$      257,500
Sale price			$      300,000
Profit/(Loss)	Sale price less WDV	$        42,500
Tax	Profit/(Loss)*tax rate	$        14,450
Sale price after-tax	Sale price less tax		$      285,550
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5
Revenue		$         200,000	$      200,000	$       200,000	$            200,000	$      200,000
Operating cost		$           15,000	$        15,000	$         15,000	$              15,000	$        15,000
Contribution		$         185,000	$      185,000	$       185,000	$            185,000	$      185,000
Less: Depreciation		$           51,500	$        51,500	$         51,500	$              51,500	$        51,500
Profit before tax (PBT)		$         133,500	$      133,500	$       133,500	$            133,500	$      133,500
Tax@34%	PBT*Tax rate	$           45,390	$        45,390	$         45,390	$              45,390	$        45,390
Profit After Tax (PAT)	PBT - Tax	$           88,110	$        88,110	$         88,110	$              88,110	$        88,110
Add Depreciation	PAT + Dep	$           51,500	$        51,500	$         51,500	$              51,500	$        51,500
Cash Profit after-tax		$         139,610	$      139,610	$       139,610	$            139,610	$      139,610
Calculation of NPV
						13.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor	Present values
0		$        (515,000)	$       (20,000)		$           (535,000)	1.0000	$       (535,000.00)
1				$       139,610	$            139,610	0.8850	$        123,548.67
2				$       139,610	$            139,610	0.7831	$        109,335.11
3				$       139,610	$            139,610	0.6931	$          96,756.73
4				$       139,610	$            139,610	0.6133	$          85,625.43
5		$         285,550	$        20,000	$       139,610	$            445,160	0.5428	$        241,615.01
					Net Present Value		$        121,880.95