Question

# A firm is deciding on a new project. Use the following information for the project evaluation...

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?

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\$