Question

Your company, Dominant Retailer, Inc., is considering a project whose data are shown below. Revenue and cash operating expenses are expected to be constant over the project's 5 year expected operating life; annual sales revenue is $99,000.00 and cash operating expenses are $49,750.00. The new equipment's cost and depreciable basis is $155,000.00 and it will be depreciated by MACRS as 5 year property. The new equipment replaces older equipment that is fully depreciated but can be sold for $7,000. In addition, the new equipment requires an additional $5,000 of net operating working capital, which can be fully recovered at the end of the project. The new equipment is expected to be sold for $10,750 at the end of the project in year 5. The marginal tax rate is 20.00%.

What is the project's Initial Cash Outlay at Year 0?

Using the information from problem 2 on Dominant Retailer, Inc., what is the Year 1 Net Operating Cash Flow?

Using the information from problem 2 on Dominant Retailer, Inc., what is the Terminal Year Non–Operating Cash Flow at the end of Year 5?

Using the information from problem 2 on Dominant Retailer, Inc., what is the NPV of the Project if Dominant Retailer’s WACC is 12.75%?

Enter your answers rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

i) Initial Cash Outlay = Cost of new machine + working capital - after tax sale price of old machine

= 155,000 + 5,000 - 7000 (1-0.20)

= 160,000 - 7,000 (0.8)

= 160,000 - 5,600

= -$154,400

ii) Net operating cash flow in year 1

Sales = 99,000

(-) cost= (49,750)

EBITDA= 50,249

(-) Depreciation (20% × 155,000) = (31,000)

EBT= 19,249

(-) Tax = (3,849.8)

Net profit= 15,399.2

(+) depreciation = 31,000

Net Operating cash flow = $46,399.2

iii) Terminal cash flow in year 5

Non operating = after tax sale proceed + working capital

= 10,750 (1-0.20) + 5,000

= 10,750 (0.80) + 5,000

= 8,600 + 5,000

= $13,600

iv)

Year	1	2	3	4	5
Sales	99,999	99,999	99,999	99,999	99,999
(-) cost	(49,750)	(49,750)	(49,750)	(49,750)	(49,750)
EBITDA	50,249	50,249	50,249	50,249	50,249
(-)Depreciation	(31,000)	(49,600)	(29,760)	(17,856)	(17,856)
EBT	19,249	649	20,489	32,393	32,393
(-)Tax	(3,849.8)	(129.8)	(4,097.8)	(6,478.6)	(6,478.6)
Net Profit	15,399.2	519.2	16,391.2	25,914.4	25,914.4
(+) Depreciation	31,000	49,600	29,760	17,856	17,856
(+) Working capital					5,000
(+) After tax sales value					8,600
Operating cash flow	46,399.2	50,119.2	46,151.2	43,770.4	57,370.4

Using financial calculator to calculate Npv

Inputs: C0= -154,400

C1= 46,399.2. Frequency= 1

C2= 50,119.2. Frequency= 1

C3= 46,151.2. Frequency= 1

C4= 43,770.4. Frequency= 1

C5= 57,370.4. Frequency= 1

I= 12.75%

Npv= compute

We get, Npv of the project as $16,944.75