Question

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.

Answer 1

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.