Question

You are evaluating a capital project with a Net Investment of $400,000, which includes an increase in net working capital of $16,000. The project has a life of 12 years with an expected salvage value of $3,000. The project will be depreciated via simplified straight-line depreciation. Revenues are expected to increase by $90,000 per year and operating expenses by $8,000 per year. The firm's marginal tax rate is 40 percent and the cost of capital for this project is 15%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign.

Answer #1

Annual Operating Cf: | |||||

Annual revenues | 90000 | ||||

Less: Cost | 8000 | ||||

Less: Depreciation (400000-3000)/12 | 33083 | ||||

Before tax Income | 48917 | ||||

Less: Tax @ 40% | 19566.8 | ||||

After tax income | 29350.2 | ||||

Add: Depreciation | 33083 | ||||

Annual Cashflows | 62433.2 | ||||

Multiply: Annuity PVF at 15% for 12yrs | 5.84737 | ||||

Present value of Inflows | 365070 | ||||

Present value of salvage (3000*0.122894) | 368.682 | ||||

Present value of WC release (16000*0.122894) | 1966.304 | ||||

Total Inflows | 367405 | ||||

Less: Initial investment | -400000 | ||||

Less: Investment in WC | -16000 | ||||

Net present value | -48595 | ||||

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