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13.Consider a two-year project with annual estimated revenues of $500,000 and annual estimated operating costs of...

13.Consider a two-year project with annual estimated revenues of $500,000 and annual estimated operating costs of $250,000. These cash flows begin at the end of the first year. The project requires an initial capital expenditure of $200,000 which you can depreciate in a straight line over two years and has zero salvage value. The project requires a $150,000 working capital investment incurred immediately and recovered after the two years. The project requires use of land that you could sell today for a post-tax profit of $300,000, but you think you will be able to sell it for the same mount when the project is complete. What is the NPV of the project? Assume a 20% tax rate and a 12% opportunity cost of capital.

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Answer #1

Statement showing NPV

Particulars 0 1 2 NPV
Initial capital expenditure -200000
Increase in WC -150000
Opportunity loss -300000
Revenue 500000 500000
Expenditure 250000 250000
Depreciation 100000 100000
PBT 150000 150000
Tax @ 20% 30000 30000
PAT 120000 120000
Add: Depreciation 150000 150000
Annaul cash flow 270000 270000
Release of WC 150000
Release of Land 300000
Total cash flow -650000 270000 720000
PVIF @ 12% 1 0.8929 0.7972
Present value -650000 241071.43 573979.59 165051.02
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