Question

A firm is deciding on a new project. Use the following information for the project evaluation and analysis:

- The initial costs are
$450,000 for fixed assets. The fixed assets will be depreciated
straight line to a **zero book value** over the 3-year
life of the project. The fixed assets have an estimated salvage
value of $30,000 at the end of the project.

- The project also requires an additional $100,000 for net working capital to start the project. All of the net working capital will be recouped at the end of the 3 years.

- The project is expected to generate annual sales of $1,000,000 (1,000 units at $1,000) and total costs of $550,000 per year

- The firm’s marginal tax rate is 40 percent.

- The required rate of return for this project is 20%

a) What is the Operating Cash Flow for each year of the project?

b) What is the after-tax salvage value at the end of this project

c) What are the Cash Flows from Assets each year for this project?

Year
**0
1
2
3**

OCF

ΔNWC

NCS

CFFA

d) What is the NPV of this project?

Answer #1

Statement showing Annual cash flow and NPV of project

Particulars | 0 | 1 | 2 | 3 | NPV |

Purchase price of fixed asset | -450000 | ||||

Installation expense | |||||

WC required | -100000 | ||||

Annual sales | 1000000 | 1000000 | 1000000 | ||

Total cost | 550000 | 550000 | 550000 | ||

Depreciation | 150000 | 150000 | 150000 | ||

PBT | 300000 | 300000 | 300000 | ||

Tax @ 40% | 120000 | 120000 | 120000 | ||

PAT | 180000 | 180000 | 180000 | ||

Add: depreciation | 150000 | 150000 | 150000 | ||

Annual cash flow | 330000 | 330000 | 330000 | ||

Salvage vale 30000- 40%(30000) |
18000 | ||||

WC release | 100000 | ||||

Total cash flow | -550000 | 330000 | 330000 | 448000 | |

PVIF @ 20% | 1.000 | 0.833 | 0.694 | 0.579 | |

Present value | -550000 | 275000.00 | 229166.67 | 259259.26 | 213425.93 |

a) 330000$

b)18000$

c)

Total cash flow | -550000 | 330000 | 330000 | 448000 |

d ) 213425.93$

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