Question

Yummy Foods is considering a new salsa product whose data are shown below. The equipment that would be used has a 3-year tax life and would be depreciated by the straight line method over the project's 3-year life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? (Please be sure to show your calculations.) (2 points)

Hurdle Rate 10%

Net initial investment $60,000

Initial increase in NOWC $10,000

Salvage value $10,000

Sales revenues $70,000

Operating costs excluding depreciation $30,000

Tax rate 40%

Answer 1

Operating cash flow calculation

Sales = 70000

Less operating costs = 30000

Less depreciation = (60000 -10000)/3 = 16667

Profit before tax = 23333

Less tax @40% = 9333

Profit after tax = 14000

Cash flow is 14000 + depreciation = 30667

Intial cash outflow is 70000 (including 10000 working capital investment)

Year	cashflow	discount factor@10%	product
0	(70000)	1	(70000)
1	30667	0.909	27876
2	30667	0.826	25330
3	50667	0.751	38050

Last year cash flow include withdrawal of working capital and salvage value

N.p.v ( by adding products in above table) = 21276