Question

Ausel’s is considering a ten-year project that will require $850,000 for new fixed assets that will be depreciated straight-line to a zero book value over the ten years. At the end of the project, the fixed assets can be sold for 15 percent of their original cost. The project is expected to generate annual sales of $928,000 and costs of $721,000. The tax rate is 35 percent and the required rate of return is 14.6 percent. What is the net present value of the project? $8,523.72 $7684.69 $9,579.78 $10,599.28

Answer 1

Correct answer is option a.8523.72

Calculation of Net present value of the project

Calculation of Annual cash flow

Sales = 928,000

Less Cost 721,000

Less Depreciation [850,000/10] 85,000

Income before tax 122,000

Less Tax@35% 42,700

Add Depreciation 85,000

Operating cash flow 164,300

Now NPV = Present value of all cash inflows - Initial investment

= 164,300*PVIFA,14.6%,9 + [164,300+(850,000*15%)*(1-.35)*PVIF,14.6%,10] - 850,000

=164,300*4.840289 + 247,175*.255949 - 850,000

=795,259.49 + 63,264.23 - 850,000

= 8523.72

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)^n} / r], where “r” is Discount rate and “n” is the useful life of investment

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)^n], where “r” is Discount rate and “n” is the useful life of investment