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A proposed investment has a project life of four years. The necessary equipment will cost of...

A proposed investment has a project life of four years. The necessary equipment will cost of $1,200, and have a useful life of 4 years. The cost will be depreciated straight-line to a zero salvage value, but will have a market worth $500 at the end of the project’s life. Cash sales will be $2,190 per year for four years and cash costs will run $670 per year. Fixed cost is $176 per year. The firm will also need to invest $390 in net working capital. Last year, marketing research for this project cost $1,500. The appropriate discount rate is 5.8%, and the corporate marginal tax rate is 28% while the average tax rate is 34%.

(A.) What are the cash flows from assets (CFFA) for this project?   

(B.) What is the Net Present Value (NPV) of this project?

(C.) What is the Profitability Index (PI) of this project?

(D.) What is the Payback Period for this project?

(E.) What is the Internal Rate of Return (IRR) for this project?

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Answer #1
0 1 2 3 4
Investment -1200
NWC -390 390
Salvage 500
Sales 2190 2190 2190 2190
Costs -670 -670 -670 -670
Depreciation -300 -300 -300 -300
EBT 1220 1220 1220 1220
Tax (28%) -463.6 -463.6 -463.6 -463.6
Profits 756.4 756.4 756.4 756.4
CFFA -1590 1056.4 1056.4 1056.4 1806.4
NPV $2,685.94
PI 2.69
Payback 1.51
IRR 60.79%

Marketing research cost is sunk cost and not considered.

Depreciation = Investment / Life

CFFA = Investment + NWC + Profits + Depreciation + After-tax Salvage Value

NPV and IRR can be calculated using the same function in excel given the cash flows and discount rate of 5.8%

PI = 1 + NPV / CF0 = 1 + 2,685.94 / 1590 = 2.69

Payback Period = 1590 / 1056.4 = 1.51

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