Question

Kasper Clothing Co. is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Weston's products and would reduce their pre-tax annual cash flows cannibalization cost). What's the project's NPV? Use two decimal places for accuracy. Cost of capital 12.0% Cannibalization cost, each year for 3 years $5,000 Investment cost (depreciable basis) $90.000 Straight-line depreciation Rate, each year for 3 years 33.33% Sales revenues, each year for 3 years $72,000 Annual operating costs (exclude depreciation), each year for 3 years $25,000 Tax rate 35.0% The project's NPV = QUESTION 25 Continue with the previous question, If the project is to be terminated at the end of year 2 and can be sold for $36,000, the project's NPV =

Answer 1

24)

PVIE Depreciat ion Net income Depreciati After-tax on L OCF Year Revenue Costs PBT Tax@35% 1 $ 72,000 $ 30,000 $30,000 2 $ 72,000 $30,000 $30,000 3 $ 72,000 $ 30,000 $ 30,000 $ $ $ 12,000 $ 12,000 $ 12,000 $ 4,200 $ 4,200 $ 4,200 $ 7,800 7,800 7,800 $ 30,000 $ 37,800 $ 30,000$ 37,800 $ 30.000 $ 37,800 Investment Net cash flow @12% Present value $ (90,000) $ (90,000) 1.000 $ (90,000.00) $ 37,800 0.893 $ 33,750.00 37,800 0.797 $ 30,133.93 $ 37,800 0.712 $ 26,905.29 $ Net present value (NPV) $ 789.22

25)

PVIE Depreciat ion Net income Depreciati After-tax on L OCF Year Revenue Costs PBT Tax@35% Investment Net cash flow @12% Present value $ (90,000) $ (90,000)| 1.000 $ (90,000.00) $ 37,800 0.893 $ 33,750.00 $ 33,900.00 $ 71,700 0.797 $ 57,158.80 1 $ 72,000 2 $ 72,000 $ 30,000 $ 30,000 $ 30,000 $30,000 $ $ 12,000 12,000 $ $ 4,200 $ 4,200 $ 7,800 7,800 $ 30,000 $ 30,000 $ 37,800 $ 37,800 Net present value (NPV) $ 908.80 Asset cost Less: Depreciation charged WDV at the time of sale Sale value of machine Profit/(Loss) on sale Less: Tax @ 35% After tax cash salvage value $ 90,000 $ 60,000 $ 30,000 $ 36,000 $ 6,000 $ 2,100 $ 33,900

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