Question

home / study / business / finance / finance questions and answers / eggz, inc., is considering the purchase of new equipment that will allow the company to collect ... Question: Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect l... 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 $460,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $66,000 at the end of the project in 5 years. Sales would be $303,000 per year, with annual fixed costs of $54,000 and variable costs equal to 35 percent of sales. The project would require an investment of $39,000 in NWC that would be returned at the end of the project. The tax rate is 22 percent and the required return is 8 percent. Calculate the NPV of this project.

Answer 1

The cash flows in Year 0 is :

= $460,000 + $39,000

= $499,000

Sales : $303,000

variable costs : $106050

fixed costs : $54,000

EBITDA : $1,42,950

So, the cash flows from CF1 TO CF4  are :

EBITDA ( 1 - Tax rate) + depreciation tax shield

= $142,950 * (1 - 0.22) + $460,000 * 0.22

=$111,501 + $101,200

= $212,701

The cash flows from Year 2 to Year 4 is :

= $111,501

The cash flow in Year 5 is :

= $111,501 + after tax salvage value + recovery of working capital

=$111,501 + $66,000 (1 - 0.22) + $39,000

=$201,981

SO, the NPV of the project is :

CF0 = (499,000)

CF1 = $212,701 ( DUE TO BONUS DEPRECIATION)

CF2 TO CF4 = $111,501

CF5= $201,981

NPV = $101,474.0332