Question

Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.2 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,020,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $13.3 million in revenues with $5.3 million in operating costs. The tax rate is 22 percent and the discount rate is 14 percent. The market value of the equipment over the life of the project is as follows:

  

Year	Market Value ($ millions)
1		$	14.20
2			11.20
3			8.70
4			2.05

a.	Assuming Hand Clapper operates this project for four years, what is the NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

b-1	Compute the project NPV assuming the project is abandoned after only one year. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

b-2	Compute the project NPV assuming the project is abandoned after only two years. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

b-3	Compute the project NPV assuming the project is abandoned after only three years. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

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Answer 1

Sales	13,300,000
Costs	5,300,000
Depreciation	4,050,000
EBT	3,950,000
Tax (22%)	869,000
Net Income	3,081,000
Cash Flows (OCF)	7,131,000

Operating Cash Flows = Net Income + Depreciation

a) Four year cash flows are as follows

Year	CF
0	-$17,220,000
1	$7,131,000
2	$7,131,000
3	$7,131,000
4	$9,750,000

Cash Flows (CF) = Investment + Working Capital + After-tax Salvage Value + OCF

NPV can be calculated using NPV function on a calculator or excel with 14% discount rate given the cash flows.

NPV = $5,108,340.69

b3) Similarly,

Year	CF
0	-$17,220,000
1	$7,131,000
2	$7,131,000
3	$15,828,000

NPV = $5,205,785.26

b2)

Year	CF
0	-$17,220,000
1	$7,131,000
2	$18,669,000

NPV = $3,400,452.45

b1)

Year	CF
0	-$17,220,000
1	$21,900,000

NPV = $1,990,526.32