Question

# You are evaluating a capital project with a Net Investment of \$95,000, which includes an increase...

You are evaluating a capital project with a Net Investment of \$95,000, which includes an increase in net working capital of \$5,000. The project has a life of 9 years with an expected salvage value of \$3,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by \$20,000 per year and operating expenses by \$4,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 8%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign.

Initial investment = 95,000

Cash flow from year 1 to 8

Sale = 20,000

(-) cost = (4,000)

EBITDA= 16,000

(-) depreciation = (9,666.67)

EBT = 6,333.33

(-) Tax = (2,533.33)

Net profit = 3,800

+ depreciation = 9,666.67

Operating cash flow = 13,466.67

Note:- Depreciation= 95,000 - 5,000 - 3,000 / 9

= 87,000 / 9

= 9,666.67

Cash flow in year 9

= Operating cash flow of year 8 + working capital + 3,000 ( 1-tax rate)

= 13,466.67 + 5,000 + 3,000 (1-0.40)

= 18,466.67 + 3000 (0.60)

= 18,466.67 + 1,800

= 20,266.67

Using financial calculator to calculate the net present value

Inputs: C0= -95,000

C1= 13,466.67 Frequency= 8

C2= 20,266.67 Frequency= 1

I= 8%

Npv= compute

We get, net present value of the project as -7,473.53

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