Question

Masters Mining is considering the purchase of some new equipment that will expand their business. The revenues and expenditures associated with that expansion are listed below (negative numbers in parentheses). Find the Net Present Value of this expansion project and indicate whether you advise Miller to adopt the project. Time 0 1 2 3 Equipment ($1,200,000) Installation ($50,000) Change in NOWC ($80,000) Sales $1,370,000 $1,450,000 $1,554,000 - non-depreciable Costs ($900,000) ($912,000) ($944,000) - Depreciation & Amortization ($412,500) ($562,500) ($187,500) -Tax ($20,126) $8,576 ($147,876) Salvage $290,000 - Capital Gains Tax ($70,876) Return NOWC $80,000 Cash Flow WACC 13.00% NPV

Answer 1

Time	0	1	2	3
Equipment	-1200000
Installation	-50000
Change in NOWC	-80000
Sales		1370000	1450000	1554000
Costs		-900000	-912000	-944000
D&A		-412500	-562500	-187500
Tax		-20126	8576	-147876
Salvage				290000
Capital Gains Tax				-70876
Return NOWC				80000
WACC				13%
Total Cash Flows	-1330000	449874	546576	761248
NPV	$21,018.42

D&A are not cash expense, hence, are not included in the cash flow.

Since, the project NPV is positive, hence Miller should adopt the project.