Question

# You are evaluating a capital budgeting replacement project with a net investment of \$85,000, which includes...

You are evaluating a capital budgeting replacement project with a net investment of \$85,000, which includes both an after-tax salvage from the old asset of \$5,000 and an additional working capital investment of \$10,000. The expected annual incremental cash flows after-tax is \$14,000. The project has a life of 9 years with an expected terminal value at the end of the project of \$13,000. The cost of capital of the firm is 10 percent and the firm’s marginal tax rate is 40 percent. What is the net present value of the project?

 Year Cash flow Present value calculation Present value 0 -90000 -90,000.00 1 14000 =14000/(1+10%)^1 12,727.27 2 14000 =14000/(1+10%)^2 11,570.25 3 14000 =14000/(1+10%)^3 10,518.41 4 14000 =14000/(1+10%)^4 9,562.19 5 14000 =14000/(1+10%)^5 8,692.90 6 14000 =14000/(1+10%)^6 7,902.64 7 14000 =14000/(1+10%)^7 7,184.21 8 14000 =14000/(1+10%)^8 6,531.10 9 27000 =27000/(1+10%)^9 11,450.64 NPV -3,860.40
 Initial cost of project & Net working capital = 85000 + 5000 Initial cost of project & Net working capital = 90000 Year 9 Cash flow = Annual cash flow + Salvage value Year 9 Cash flow = 14000 + 13000 = 27000

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