Question

Yellow Sand Food is considering a project that would last for 2 years and have a cost of capital of 14.31 percent. The relevant level of net working capital for the project is expected to be 17,000 dollars immediately (at year 0); 30,000 dollars in 1 year; and 0 dollars in 2 years. Relevant expected revenue, costs, depreciation, and cash flows from capital spending in years 0, 1, and 2 are presented in the following table (in dollars). The tax rate is 50 percent. What is the net present value of this project?

	Year 0	Year 1	Year 2
Revenue	$0	173,000	173,000
Costs	$0	53,000	53,000
Depreciation	$0	38,000	38,000
Cash flows from capital spending	-83,000	0	14,000

Answer 1

			YEar0	YEar1	YEar2
Revenue				173000	173000
Less: Cost				53000	53000
Less: Dep				38000	38000
Net Income before tax				82000	82000
Less: Tax @ 50%				41000	41000
After tax Income				41000	41000
Add: Dep				38000	38000
Operating CF				79000	79000
Change in WC			-17000	-13000	30000
Capital spending			-83000	0	14000
Net Cash flws			-100000	66000	123000
PVF at 14.31%			1	0.874814	0.7653
Present value of CF			-100000	57737.73	94131.86
NPV			51870