Question

# Consider the following 5-year project: Cost of equipment = \$500,000 - Additional shipping and installation cost...

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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