Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $832,300.00 work cell. Further, it will cost the firm $51,200.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $65,000.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $7,200.00. Finally, the firm will invest $11,900.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $902,000.00 with expenses estimated at 38.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 38.00%.

The work cell is estimated to have a market value of $459,000.00 at the end of the fourth year. The firm expects to reclaim 81.00% of the final NWC position.

The cost of capital is 15.00%.

A) What is the cash flow to start the project in year 0?

B) What is the yearly operating cash flow for the project?

C) What is the terminal cash flow for the project?

D) What is the NPV the project if we end the project after 4 years?

Answer 1

Tax rate		38%
Calculation of initial investment
Cost of work cell		$           832,300
Installation cost		$             51,200
The effective cost of workcell		$           883,500
Training cost		$             65,000
Net working capital		$             11,900
After-tax sale value of old equipment
WDV	$                   -
Sale price	$            7,200
Gain	$            7,200
Tax @ 38%	$            2,736
After tax sale value of old equipment	$            4,464	$              (4,464)
Initial investment		$           955,936
Calculation of annual depreciation
Depreciation		Year-1-20
Cost		$           883,500
Dep Rate= (1/20)		5.00%
Depreciation		$             44,175
Calculation of after-tax salvage value
Cost of machine			$          883,500
Depreciation- 44175*4			$          176,700
WDV			$          706,800
Sale price			$          459,000
Profit/(Loss)			$         (247,800)
Tax			$           (94,164)
Sale price after-tax			$          553,164
Calculation of annual operating cash flow
		Year-1-20
Sale		$           902,000
Less: Operating Cost		$           342,760
Contribution		$           559,240
Less: Depreciation		$             44,175
Profit before tax		$           515,065
Tax@38%		$           195,725
Profit After Tax		$           319,340
Add Depreciation		$             44,175
Cash Profit after-tax		$           363,515
Calculation of annual terminal cash flow
Recovery of work cell		$           553,164
Recovery of working capital	11900*81%	$                9,639
Terminal cash flow		$           562,803
Calculation of NPV
						15.00%
Year			Cap Investment	Operating cash	Annual Cash flow	PV factor	Present values
0			$         (955,936)		$          (955,936)	1.0000	$          (955,936)
1				$           363,515	$           363,515	0.8696	$           316,100
2				$           363,515	$           363,515	0.7561	$           274,870
3				$           363,515	$           363,515	0.6575	$           239,017
4			$          562,803	$           363,515	$           926,318	0.5718	$           529,625
					Net Present Value		$           403,677