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All Green Inc. plans a capital project, where it requires an asset that costs $120,000. It...

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

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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
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