Question

Assume we can buy a piece of equipment for 1.5 million dollars and that equipment has a three year life span. The project requires 150,000 in working capital. Sales from the piece of equipment will be 3.4 million annually with an operating margin of 22% and annual interest of 75,000.00 and a tax rate of 28%. If the salvage value is 150,000.00 what is the NPV of this project when the companies cost of capital is 7%?

Answer 1

Depreciation = $1,500,000 / 3 = $500,000

Operating Margin = EBIT / Sales

0.22 = EBIT / $3,400,000

EBIT = 0.22 x $3,400,000 = $748,000

After - Tax OCF = [(EBIT - Interest) x (1 - t)] + Depreciation

= [($748,000 - $75,000) x (1 - 0.28)] + $500,000 = $484,560 + $500,000 = $984,560

After-tax SV = SV x (1 - t) = $150,000 x (1 - 0.28) = $108,000

CF0 = -($1,500,000 + $150,000) = -$1,650,000

C01 = $984,560; F01 = 2;

C02 = $984,560 + $108,000 + $150,000 = $1,242,560; F02 = 1;

Press NPV. put I = 7, press down key, then CPT, which gives $1,144,401.46

Hence, NPV = $1,144,401.46