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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?

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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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