Answer:
Initial Investment = $2,700,000
Useful Life = 3 years
Depreciation Year 1 = 33.33% * $2,700,000
Depreciation Year 1 = $899,910
Depreciation Year 2 = 44.45% * $2,700,000
Depreciation Year 2 = $1,200,150
Depreciation Year 3 = 14.81% * $2,700,000
Depreciation Year 3 = $399,870
Book Value at the end of Year 3 = $2,700,000 - $899,910 -
$1,200,150 - $399,870
Book Value at the end of Year 3 = $200,070
After-tax Salvage Value = Salvage Value - (Salvage Value - Book
Value) * tax rate
After-tax Salvage Value = $210,000 - ($210,000 - $200,070) *
0.35
After-tax Salvage Value = $206,524.50
Initial Investment in NWC = $300,000
Answer to Part 1.
Year 0:
Net Cash Flow = Initial Investment + Initial Investment in
NWC
Net Cash Flow = -$2,700,000 - $300,000
Net Cash Flow = -$3,000,000
Year 1:
Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax *
Depreciation
Operating Cash Flow = ($2,080,000 - $775,000) * (1 - 0.35) + 0.35 *
$899,910
Operating Cash Flow = $1,163,218.50
Net Cash Flows = Operating Cash Flow
Net Cash Flows = $1,163,218.50
Year 2:
Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax *
Depreciation
Operating Cash Flow = ($2,080,000 - $775,000) * (1 - 0.35) + 0.35 *
$1,200,150
Operating Cash Flow = $1,268,302.50
Net Cash Flows = Operating Cash Flow
Net Cash Flows = $1,268,302.50
Year 3:
Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax *
Depreciation
Operating Cash Flow = ($2,080,000 - $775,000) * (1 - 0.35) + 0.35 *
$399,870
Operating Cash Flow = $988,204.50
Net Cash Flows = Operating Cash Flow + NWC recovered + After-tax
Salvage Value
Net Cash Flows = $988,204.50 + $300,000 + $206,524.50
Net Cash Flows = $1,494,729.00
Answer b.
Required Return = 12%
NPV = -$3,000,000 + $1,163,218.50/1.12 + $1,268,302.50/1.12^2 +
$1,494,729.00/1.12^3
NPV = $113,589.50
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