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A project has an initial requirement of $210944 for new equipment and $9567 for net working...

A project has an initial requirement of $210944 for new equipment and $9567 for net working capital. The installation costs to get the new equipment in working condition are 8125. The fixed assets will be depreciated to a zero book value over the 5-year life of the project and have an estimated salvage value of $100516. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $95257 and the cost of capital is 16% What is the project's NPV if the tax rate is 39%?

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Answer #1

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NPV Present value of Cash Inflows - Present value of cash outlflows
382780.64-228636
154144.64
Present value of cash outlflows Purchase price of equipment + Net working capital
cost + installation + Net working capital
210944+8125+9567 = 228636
Present value of cash inflows Present value of operating cash flows for 5 years + Recovery of Net working capital + After tax effect of salvage value
311899.4 + 9567 + 61314.24
382780.64

Present value of Operating cash flows = present value annuity factor (16%,5 ) * 95,257

= [1/(1.16) + 1/(1.16)2 + 1/(1.16)2 + 1/(1.16)3 + 1/(1.16)4 + 1/(1.16)5] * 95,257

= 3.2743 * 95,257

= $ 311,899.4

After tax salvage value = $ 100,516 - tax rate * (salvage - book value)

= $ 100,516 - 39% ( 100516 - 0)

= $ 61,314.76

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