Question

Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $440,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $54,000 at the end of the project in 5 years. Sales would be $287,000 per year, with annual fixed costs of $50,000 and variable costs equal to 37 percent of sales. The project would require an investment of $31,000 in NWC that would be returned at the end of the project. The tax rate is 23 percent and the required return is 10 percent. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The cost of the equipment is $440,000.

The depreciation amount is $440,000/5

= $88,000

the cash outflow in Year 0 is = ($440,000 + investment in working capital)

= ($440,000 + $31,000)

=($471,000)

The cash flows are :

CF1 =

Sales : $287,000

variable costs : $106,190

Fixed costs : $50,000

EBIT : $130810 ( 1-0.23) + 0.23* $88,000

= 100,723.7 + 20240

= 120,963.7

CF2 TO CF4 = $100,723.7

CF5 = Cash flow in year 5 + after tax salvage value + recovery of net working capital

CF5 = $100723.7 + $54,000 ( 1 - 0.23) + $31,000

= $173,303.7

CF0 = ($471,000)

CF1= $120,963.7

CF2 TO CF4 = $100,723.7

CF5 = $173,303.7

The NPV is = ($25,711.461)

= ($25,711.46 ) rounded off to two decimal places