Question

All Green Inc. plans a capital project, where it requires an asset that costs $120,000. It has an expected economic life of 3 years. The asset will be depreciated using the straight-line method to $0 book value. The company expects that the asset will be worth $30,000 at the end of the project. Incremental sales are expected to be $100,000, $110,000, and 120,000 for year 1 to 3, respectively. Corresponding expenses are expected to be 50% of the sales. The company will need to invest $12,000 at time=0 in net working capital, which will increase $1,000 each year. The cost of capital is 12% and the corporate tax rate is 40%. Develop the cash flows for the project. What are its NPV, IRR, and MIRR? Interpret the results in your own words

Answer 1

Year	0	1	2	3
Sales		100000	110000	120000
Expenses		50000	55000	60000
Depreciation		40000	40000	40000
Profit before tax		10000	15000	20000
Tax @ 40%		4000	6000	8000
PAT		6000	9000	12000
Add: depreciation		40000	40000	40000
Less: working capital	12000	13000	14000	-14000
Less: capex	120000
Add:salvage				30000
Less:Tax @ 40%				12000
Cash flow	-132000	33000	35000	84000
NPV @ 12%	-14844.39
IRR	6.28%
MIRR	4.81%
We assume that working capital is recovered at end of project. The project is not feasible because of negative NPV