Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $835,100.00 work cell. Further, it will cost the firm $53,300.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $61,400.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $6,000.00. Finally, the firm will invest $10,900.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $904,000.00 with expenses estimated at 39.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 37.00%. The work cell is estimated to have a market value of $482,000.00 at the end of the fourth year. The firm expects to reclaim 83.00% of the final NWC position. The cost of capital is 14.00%.

What is the NPV the project if we end the project after 4 years?

What is the terminal cash flow for the project?

What is the yearly operating cash flow for the project?

What is the cash flow to start the project in year 0?

Answer 1

ABC	0	1	2	3	4
Investment	-949,800
NWC	-10,900				9,047
Salvage					482,000
Sales		904,000	904,000	904,000	904,000
Costs		-352,560	-352,560	-352,560	-352,560
Depreciation		-47,490	-47,490	-47,490	-47,490
EBT		503,950	503,950	503,950	503,950
Tax (37%)		-186,462	-186,462	-186,462	-186,462
Profit		317,489	317,489	317,489	317,489
Cash Flows	-960,700	364,979	364,979	364,979	958,826
NPV	$454,347.92

Depreciation = Investment / No. of years (20)

Cash Flows = Investment + NWC + Profit + Depreciation + After-tax Salvage Value

NPV can be calculated using the same function in excel or calculator with 14% discount rate.