Question

Your company, Dominant Retailer, Inc., is considering a project whose data are shown below. Revenue and cash operating expenses are expected to be constant over the project's 5 year expected operating life; annual sales revenue is $95,000.00 and cash operating expenses are $39,750.00. The new equipment's cost and depreciable basis is $140,000.00 and it will be depreciated by MACRS as 5 year property. The new equipment replaces older equipment that is fully depreciated but can be sold for $7,500. In addition, the new equipment requires an additional $5,000 of net operating working capital, which can be fully recovered at the end of the project. The new equipment is expected to be sold for $10,995 at the end of the project in year 5. The marginal tax rate is 20.00%.

A) What is the project's Initial Cash Outlay at Year 0?

B)What is the Year 5 Net Operating Cash Flow?

C)What is the Terminal Year Non–Operating Cash Flow at the end of Year 5?

D)What is the NPV of the Project if Dominant Retailer’s WACC is 12.75%?

Answer 1

A.

Calculate the project’s initial cash outlay at year 0.

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B.

Calculate the Year 5 net operating cash flow.

Here,

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C.

Calculate the non-operating cash flow.

Here,

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D.

Calculate the NPV.

Formulas used:

Results obtained:

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