Question

Given the following data, calculate the net present value for this capital budgeting project: Annual operating...

Given the following data, calculate the net present value for this capital budgeting project: Annual operating cash flow = $198,500 Fixed asset investment = $649,000 Working capital investment = $38,000 Project life=4 years; Depreciation method=SLD to zero Market salvage value=$187,000; Cost of capital=14%; Tax rate=35%

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Answer #1

Given data:

Annual Operating cash flow = $ 198500

Fixed asset investment = $ 649000

Working capital investment = $ 38000

Project life = 4 years

Market salvage value = $ 187000

Cost of capital = 14%

Tax rate = 35%

NPV = Present value of all cash inflows – Initial Investments

= $ 673030.72 - $ 687000

= - $13969.28

Since the NPV of the project is negative, therefore Project should not be accepted.

Working note:

PV of all cash inflows = Present value (yearly interest income) + Repayment of Salvage value (after tax) + Terminal value of working capital

= $ 198500(PVIFA14%, 4yrs) + {$ 187000*(1-0.35)}(PVFA14%, 4yrs) + $ 38000(PVFA14%, 4yrs)

= $ 198500*2.9137 + $ 121875*0.5921 + $ 38000*0.5921

= $ 578371.89 + $ 72159.78 + $ 22499.05

= $ 673030.72

Initial Investments = Fixed asset investment + Working capital investment

= $ 649000 + $ 38000

=$ 687000

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