Question

A new product called RanTan is being considered by NewBok. The project requires an outlay of $160,000 for equipment, $32,000 in additional net working capital. The project, including the equipment, is expected to have an 8-year life, but the equipment will be depreciated to a zero book value over 6 years. Further, the equipment is expected to be sold for $15,000 at the end of the 8 years. Revenues minus costs are expected to be $50,000 per year. The cost of capital in is 14%. The relevant tax rate is 38%. Compute the NPV of the RanTan project.

Answer 1

L14 for =SUM(C14:K14) A В 50,000.00 2 Less 4 5 Less year Savings depreciation EBT tax@38% EAT depreciation Operating Cash flows $ 50,000.00 $ $ 26,666.67$ $ 23,333.33 $ $ 8,866.67 $ $ 14,466.67 $ $ 26,666.67$ $ 41,133.33 $ 50,000.00 $ 26,666.67$ 23,333.33 $ 8,866.67$ 14,466.67 $ 26,666.67$ 41,133.33 $ 50,000.00 $ 26,666.67$ 23,333.33 $ 8,866.67$ 14,466.67$ 26,666.67$ 41,133.33 $ 50,000.00 $ 26,666.67$ 23,333.33 $ 8,866.67$ 14,466.67 $ 26,666.67$ 41,133.33 $ 50,000.00 $ 26,666.67$ 23,333.33 $ 8,866.67$ 14,466.67$ 26,666.67$ 41,133.33 $ 50,000.00 $ 26,666.67$ 23,333.33 $ 8,866.67 $ 14,466.67$ 26,666.67$ 41,133.33 $ 50,000.00 $ . $ 50,000.00 $ 19,000.00 $ 31,000.00 $ 50,000.00 19,000.00 31,000.00 6 7 Add 31,000.00 $ 31,000.00 cost $ $ -1,60,000.00 -32,000.00 NWC Aftertax Salvage Value Cash flows pv@14% present value $ $ $ $ -1,92,000.00 $ 41,133.33 $ 0.8772 $ (1,92,000.00) $ 36,081.87 $ 41,133.33 $ 0.7695 31,650.76 $ 41,133.33 $ 0.6750 27,763.83 S 41,133.33 $ 0.5921 24,354.24 $ 41,133.33 $ 0.5194 21,363.36 $ 41,133.33 $ 0 .4556 18,739.79 $ 31,000.00 0.3996 12,388.76 32,000.00 9,300.00 72,300.00 0.3506 NPV 25,345.42S $ 5,688.03 Depreciation 160000/6 26666.66667 15,000.00 After Tax Salvage Value Sale value Book value profit tax@38% Aftertax Salvage Values 15,000.00 5,700.00 9,300.00