Question

# Your small company is considering producing a new line of orange flavored soft drink. This project...

Your small company is considering producing a new line of orange flavored soft drink. This project is expected to generate additional revenues of \$220,000 and additional costs of \$100,000 per year for 5 years (years 1 – 5). Undertaking the project will require an increase in the company’s net working capital (inventory) of \$30,000 today (year 0). At the end of the project (year 5), inventory will return to the original level. Fixed assets needed for the project would cost \$350,000. Assets will depreciate straight line to \$50,000 (the market value of the assets at the end of the project, which will be sold). The marginal tax rate is 10%. The weighted average cost of capital (interest rate) for the firm is 8%.

What is the present value of this project?

The answer is 129,615.60 but I don't know to get that answer. I answered all the other questions correctly such as cost of the project and the cash flow in year 1 -4.

 Orange 0 1 2 3 4 5 Investment -350,000 NWC -30,000 30,000 Salvage 50,000 Sales 220,000 220,000 220,000 220,000 220,000 Costs -100,000 -100,000 -100,000 -100,000 -100,000 Depreciation -60,000 -60,000 -60,000 -60,000 -60,000 EBT 60,000 60,000 60,000 60,000 60,000 Tax (10%) -6000 -6000 -6000 -6000 -6000 Net Income 54,000 54,000 54,000 54,000 54,000 Cash Flows -380,000 114,000 114,000 114,000 114,000 194,000 NPV \$129,615.60

Depreciation = (350,000 - 50,000) / 5 = 60,000

Cash Flows = Investment + NWC + Salvage + Net Income + Depreciation

NPV can be calculated using the same function in excel or calculator with 8% discount rate.

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