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
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 |
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