Question

A project has an initial requirement of $59390 for equipment. The equipment will be depreciated to a zero book value over the 5-year life of the project. The investment in net working capital will be $10586. All of the net working capital will be recouped at the end of the 5 years. The equipment will have an estimated salvage value of $13947. The annual operating cash flow is $50031. The cost of capital is 5 percent. What is the project’s net present value if the tax rate is 22 percent?

Answer 1

Initial Investment = $59,390
Useful Life = 5 years

Initial Investment in NWC = $10,586

Salvage Value = $13,947

After-tax Salvage Value = $13,947 * (1 - 0.22)
After-tax Salvage Value = $10,878.66

Annual Operating Cash Flow = $50,031

Year 0:

Net Cash Flows = Initial Investment + Initial Investment in NWC
Net Cash Flows = -$59,390 - $10,586
Net Cash Flows = -$69,976

Year 1 to Year 4:

Net Cash Flows = Operating Cash Flow
Net Cash Flows = $50,031

Year 5:

Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax Salvage Value
Net Cash Flows = $50,031 + $10,586 + $10,878.66
Net Cash Flows = $71,495.66

Required return = 5%

NPV = -$69,976 + $50,031/1.05 + $50,031/1.05^2 + $50,031/1.05^3 + $50,031/1.05^4 + $71,495.66/1.05^5
NPV = $163,450.17

NPV of the project is $163,450.17