Question

Lakeside Winery is considering expanding its wine-making operations. The expansion will require new equipment costing $633,257 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The estimated salvage value is $199,091. The project requires $35,622 initially for net working capital, all of which will be recovered at the end of the project. The projected operating cash flow is $202,005 a year. What is the net present value of this project (in $) if the relevant discount rate is 14.11 percent and the tax rate is 33 percent?

Answer 1

Initial Investment = $633,257
Useful Life = 4 years

Initial Investment in NWC = $35,622
Salvage Value = $199,091

After-tax Salvage Value = $199,091 * (1 - 0.33)
After-tax Salvage Value = $133,390.97

Annual Operating Cash Flow = $202,005

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$633,257 - $35,622
Net Cash Flows = -$668,879

Year 1 to Year 3:

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $202,005

Year 4:

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $202,005 + $35,622 + $133,390.97
Net Cash Flows = $371,017.97

Required return = 14.11%

NPV = -$668,879 + $202,005/1.1411 + $202,005/1.1411^2 + $202,005/1.1411^3 + $371,017.97/1.1411^4
NPV = $18,065

Therefore, net present value of the project is $18,065