Question

# A company is considering an online shopping project that will require \$120,000 in fixed assets and...

A company is considering an online shopping project that will require \$120,000 in fixed assets and require another \$25,000 in net working capital at the initial of the project. At the second year and the third year, due to a more efficient operation, the company can free up \$2,500 and \$2,800 in net working capital for this project, respectively. However, in the fourth year, due to some emerging orders, the company require another \$3,000 in net working capital for this project. The project is expected to produce sales of \$100,000 with associated costs of \$70,000 per year. The project has a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the NPV for this project at a 10% discount rate?

 cash flow generated from project sales - costs depreciation book profit Taxation on book profit Net cash flow (cash inflow) (120000/5) 30000-24000 6000x 35% (a) (b) © (d) (a-d) 30000 24000 6000 2100 27900 30000 24000 6000 2100 27900 30000 24000 6000 2100 27900 30000 24000 6000 2100 27900 30000 24000 6000 2100 27900
 year Cashflows in the project (incl working capital) cash flow from business Total cash flow discounted cashflow @ 10% 0 -145000 -145000 -145000 1 27900 27900 25363.63 2 2500 27900 30400 25123.97 3 2800 27900 30700 23065.36 4 -3000 27900 24900 17007.03 5 27900 27900 17323.7 NPV -37116.31

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