Question

Garden-Grow Products is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3.) Project cost of capital (r) 10.0% Net investment in fixed assets (basis) $75,000 Required new working capital $15,000 Straight-line deprec. rate 33.333% Sales revenues, each year $75,000 Operating costs (excl. deprec.), each year $25,000 Tax rate 25.0% a. $31,573 b. $34,809 c. $33,152 d. $36,550 e. $30,069

Answer 1

Project NPV = $30069.50. refer detail working :-

Step 1: Initial investment cash outflow: Fixed Assets Working Capital ($75000+ $15000) $75,000 $15,000 $90,000 Total Initial Outflow Step 2: Operating cash flow at per year: Sales revenue Less:- Operating Expenses Less:- Depreciation @33.333% EBIT (Earning before tax) Less:- Tax on EBIT @ 25% EAT (Earning after tax) Add :- Non Cash Expenses Total operating cash flow per year (EAT + Non Cash expenses) ($75000 * 33.333%) ($75000 - $25000 - $25000) ($25000 * 25%) ($25000 - $6250) Depreciation as above ($18750 + $25000) $75,000 $25,000 $25,000 $25,000 $6,250 $18,750 $25,000 $43,750 Step 3: Terminal Cash flow at end of three year Recovered Working Capital $15,000 CF at time = 2 Step 4: CF at time = 0 CF at time = 1 -$90,000 *Cash flow at time 3 = Operating cash flow + Recoverd Working Capital ($43750 + $15000) CF at time = 3* CF at time $43,750 $58,750 $43,750 Step 5: Cost of Capital = 10% Calculate present value of Inflow using following formula: Present value of Inflow CF1 (1+r)^n CF2 (1+r)^n CF3 (1+r)^n $43,750 (1+10%)^1 $43,750 (1+10%)^2 $58,750 (1+10%)^3 Present value of Inflow $1,20,069.50 Step 6: NPV = Present value of Inflow - Initial cash outflow ($120069.5 - $90000) $30,069.50

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