Question

# Your company, Dominant Retailer, Inc., is considering a project whose data are shown below. Revenue and...

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? Note: Enter your answer rounded off to two decimal points. 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.

2.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 answer 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.

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

(1.) Calculation of project's Initial Cash Outlay at Year 0

Year 0 cash outflow = New equipment cost - Old equipment sale value net of tax + net operating working capital

Year 0 cash outlay = 155000 - ( 7000 * 0.80 ) + 5000

Year 0 cash outlay = 155000 - 5600 + 5000

Year 0 cash outlay = 154400

(2.)  NPV of the Project if Dominant Retailer’s WACC is 12.75%

 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Investment ( 80000 + 40000) 155000 Annual Sales Revenue 99000 99000 99000 99000 99000 Cash Operating Cost 49750 49750 49750 49750 49750 Less : Depreciation (Working Note) 31000 49600 29760 17856 17856 Earning before taxes 18250 -350 19490 31394 31394 Taxes @ 20% -3650 70 -3898 -6278.8 -6278.8 Earnings After Taxes 14600 -280 15592 25115.2 25115.2 Add : Depreciation 31000 49600 29760 17856 17856 Plus : Salvage Value 10750 Less : tax on salvage @ 20% 364.4 Sale Value of Old Machine ( Net of Taxes) -5600 NWC 5000 Plus : Recapture of NWC 5000 Operating Cash Flows 154400 45600 49320 45352 42971.2 58356.8 PV Factor @ 12.75% 1 0.88691796 0.786623468 0.697670482 0.61877648 0.548803974 PV of Net Cash flows (Inflow) 40443.45898 38796.26944 31640.75168 26589.56789 32026.44373 PV of Net Cash flows (Outflow) 154400 The net present value (NPV) of this project is = \$ 15096.4917 or \$ 15096.49 NPV = PV of cash inflow - PV of cash outflow = 169496.4917- 154400 = \$ 15096.4917 or \$ 15096.49 Working Note : Year 1 : 155000 * 20% = 31000 Year 2 : 155000 * 32% = 49600 Year 3 : 155000 * 19.2% = 29760 Year 4 : 155000 * 11.52% = 17856 Year 5 : 155000 * 11.52% = 17856 Book Value = 155000 * 5.76% = 8928 Gain on Sale = Salvage Value - Book Value = 10750 - 8928 = 1822 Tax on Gain on Sale = 1822 * 0.20 = 364.4

(3.) Year 2 Net Operating Cash Flow as calculated in image above is 49320.

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