A 5-yr project has an initial requirement of $142495 for new equipment and $8859 for net working capital. The installation cost is $14729. The fixed assets will be depreciated to a zero book value over 5 years and have an estimated salvage value of $27974. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $56124. The cost of capital is 10% and the tax rate is 28%. What is the net present value of the project?
Net present value = Present Value of Cash Inflows- Present Value of Cash Outflows
= -142,495 – 8,859 – 14,729 + 56,124*PVAF(10%, 5 Years) + 8,859*PVF(10%, 5 years) + 20,141*PVF(10%, 5 years)
= -166,083 + 56,124*3.791 + (8,859+20,141)*0.621
= $64,692
Calculation of salvage value net of tax;
Salvage Value = $27,974
Less: WDV (depreciated to zero) = $0
Gain on Sale =$27,974
Tax on Gain @28% = 7,833
Salvage Value net of Tax = $20,141
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