Question

Company ABC is considering a new 5-year investment into new production equipment that requires initial investment € 4 million. The project is expected to generate € 1.4 million in annual sales, with costs of € 0.5 million per year for next 5 years. ABC uses the straight-line depreciation over the 5 years of project life (book value assumed to be zero at the end of the project).

If ABC uses the straight-line depreciation over the 5 years of project life (book value assumed to be zero at the end of the project) how large is the annual depreciation? Express your answer in millions of euros.

If the tax rate is 35%. What is the annual operating cash flow of the project? Express your answer in millions of euros.
If the project do not require any net working capital and the required return of the project is 8%. What is the project’s NPV? Express your answer in millions of euros. (Tax Rate 35%)

We got the solution previously from an expert but the calculations were wrong - answer from the teacher -

mistakes in calculations of standard deviations of each stock.

Regarding to first 3 questions please note that net income is the same as profit after tax.

Answer 1

If ABC uses the straight-line depreciation over the 5 years of project life (book value assumed to be zero at the end of the project) how large is the annual depreciation? Express your answer in millions of euros.

=4/5
=0.8 million

If the tax rate is 35%. What is the annual operating cash flow of the project? Express your answer in millions of euros.

=(1.4-0.5-0.8)*(1-35%)+0.8
=0.86500 million

If the project do not require any net working capital and the required return of the project is 8%. What is the project’s NPV? Express your answer in millions of euros. (Tax Rate 35%)

=-4+0.86500/8%*(1-1/1.08^5)
=-0.54631 million