Question

The Company is considering a new project of 3 years. The initial investment on the the machine costs $380,190, and will be depreciated on a straight-line basis to zero over the project life. The machine will become worthless in the end. The project will brings in annual operating cash flow of $220,110. It also requires an additional investment in net working capital of $4,000 initially, which will be fully recovered at the end of the project. The tax rate is 28%. The discount rate is 15%. Please compute the NPV of this project.

Answer 1

Answer : Calculation of NPV

Net Present Value = Present Value of Cash Inflow - Present Value of Cash Outflow

Present Value of Cash Outflow = Initial Investment + Investment in Net Working Capital

= 380,190 + 4000

= 384,190

Present Value of Cash Inflow for 1 - 3 years = [Annual Operating Cash Flow * (1 - tax rate) + Tax saving on Depreciation]

Note : Assuming Annual Operating Cash Flow is before tax annual operating cash flow .

Depreciation of Equipment = 380190 / 3 = 126730

Present Value of Cash Inflow for 1 - 3 years = [220110 * (1 - 0.28) ]+ [126730 * 0.28]

= 158479.2 + 35484.4

= 193963.60

Present value of Cash flow for year 3 = 4000

Present value of Cash Inflow = (193963.60 * PVAF @ 15% for 3 years) + (4000 PVF@ 15% for 3rd year)

= (193963.60 * 2.2832251171) + (4000 * 0.65751623242)

= 442,862.563323 + 2630.06492968

= 445,492.63

Net Present Value = 445,492.63 - 384190

= 61302.63

answered by: anonymous