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$
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