1) A project has an initial requirement of $ 260,000 for fixed assets and $16,500 for net working capital. The fixed assets will be depreciated to a zero-book value over the four-year life of the project and have an estimated salvage value of $50,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $82,500 and the discount rate is 12 percent. What is the project's net present value if the tax rate is 21 percent?
2) Great Western Southern purchased $525,000 of equipment four years ago. The equipment is seven-year MACRS property. The firm is selling this equipment today for $150,000. What is the after-tax cash flow from this sale if the tax rate is 27 percent? The MACRS allowance percentages are as follows, commencing with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.
Solution to the QUESTION-1
Initial Investment Cost
Initial Investment Cost = Cost of the fixed asset + Working capital required
= $260,000 + $16,500
= $276,500
Year 1-3 Cash flow = $82,500 per year
Year 4 Cash Flow = Annual cash flow + Working capital + After-tax market value
= $82,500 + $16,500 + [$50,000 x (1 – 0.21)]
= $82,500 + $16,500 + [$50,000 x 0.79]
= $82,500 + $16,500 + $39,500
= $138,500
The project's net present value
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 12.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
1 |
82,500 |
0.892857 |
73,660.71 |
2 |
82,500 |
0.797194 |
65,768.49 |
3 |
82,500 |
0.711780 |
58,721.87 |
4 |
1,38,500 |
0.635518 |
88,019.25 |
TOTAL |
2,86,170.33 |
||
The Net Present Value (NPV) of the Project = Present value of annual cash inflows – Initial investment costs
= $2,86,170.33 - $276,500
= $9,670.33
“Hence, the project's net present value will be $9,670.33”
NOTE
The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.
PLEASE BE NOTED (More than 1 Question)
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