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 $500,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $90,000 at the end of the project in 5 years. Sales would be $335,000 per year, with annual fixed costs of $62,000 and variable costs equal to 37 percent of sales. The project would require an investment of $55,000 in NWC that would be returned at the end of the project. The tax rate is 25 percent and the required return is 10 percent. Calculate the NPV of this project.

Answer 1

Annual Operating cashflows
Annual incremental sales			335000
Less: Incremental VC			123950	(335000*37%)
Less: Fixed cost			62000
Net Income before tax			149050
Less: Ttax @ 25%			37262.5
Net income after taxx			111787.5
NPV
			YEar0	Year1	YEar2	YEear3	YEar4	YEar5
Initial Investment			-500000
Investment in WC			-55000
Annual income after tax				111787.5	111787.5	111787.5	111787.5	111787.5
Tax shield on Dep		(500000*25%)		125000
WC release								55000
After tax salvage value								67500
(90000-25%)
Net cashflows			-555000	236787.5	111787.5	111787.5	111787.5	234287.5
PVF at 10%			1	0.909091	0.826446	0.751315	0.683013	0.620921
Present value of casshflows			-555000	215261.4	92386.36	83987.6	76352.37	145474.1
NPV			58461.8