Company ABC is considering a new 5 year project where it will invest in a new machine. The key financial data for the project are as follows: The machine will cost $1,250,000. It will last for 5 years and will have no salvage value. Expected revenue per year is $650,000 and total cost per year is 300,000 (depreciation is not included) The straight line depreciation method is used to depreciate the machine The company’s tax rate is 25% What is the NPV of the project if the company’s cost of capital is 7%?
Select one: a. $82,564 b. $325,000 c. $1,332,564 d. -$942,485
ABC Company’s revenue is $140,000.
Its variable cost is $40,000
Its fixed costs is $80,000
It tax rate is 25%
Based on this information, what is its operating leverage?
Select one:
a. 5.0 b. 2.0 c. 1.75 d. 6.3
Solution to the FIRST QUESTION
Operating Cash Flow (OCF) for the Project
Operating Cash Flow (OCF) = [(Annual Sales - Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]
= [($650,000 - $300,000) x (1 – 0.25)] + [($1,250,000 / 5 Years) x 0.25]
= [$350,000 x 0.75] + [$250,000 x 0.25]
= $262,500 + $62,500
= $325,000
The Net Present Value (NPV) of the Project
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 7.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
1 |
3,25,000 |
0.9345794 |
3,03,738 |
2 |
3,25,000 |
0.8734387 |
2,83,868 |
3 |
3,25,000 |
0.8162979 |
2,65,297 |
4 |
3,25,000 |
0.7628952 |
2,47,941 |
5 |
3,25,000 |
0.7129862 |
2,31,721 |
TOTAL |
1,332,564 |
||
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= $1,332,564 - $1,250,000
= $82,564
“Hence, the Net Present Value (NPV) of the Project will be (a). $82,564”
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.
PLEASE BE NOTED (More than 1 Question)
Company ABC is considering a new 5 year project where it will invest in a new...
Do in Excel. Southwest Products Company is considering a project to invest. The initial investment is $15 million and the life of the project is 7 years. Its revenue per year is $10 million and cost of goods sold is 50% of revenue. The project will be depreciated by using the 7-year MACRS depreciation rate. The company’s tax rate 35% and cost of capital is 12%. Calculate payback period, discounted payback period, NPV, IRR, PI and MIRR for the project.
A company is considering a 5-year project to expand production with the purchase of a new automated machine using the latest technology. The new machine would cost $160,000 FOB St. Louis, with a shipping cost of $7,000 to the plant location. Installation expenses of $15,000 would also be required. This new machine would be classified as 7-year property for MACRS depreciation purposes. The project engineers anticipate that this equipment could be sold for salvage for $43,000 at the end of...
A company is considering a 5-year project to expand production with the purchase of a new automated machine using the latest technology. The new machine would cost $220,000 FOB St. Louis, with a shipping cost of $8,000 to the plant location. Installation expenses of $14,000 would also be required. This new machine would be classified as 7-year property for MACRS depreciation purposes. The project engineers anticipate that this equipment could be sold for salvage for $38,000 at the end of...
Company ABC is considering a new investment project. It is estimating that in the 1st year, it will be able to receive $302,000 in revenue from sales, while production cost will total $272,000, and it will be in the 34% corporate income tax rate bracket. In addition, your company would need to spend $200,000 on buying equipment, depreciating over 11 years (straight line). Find first year Operating Cash Flow.
A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $100,000 would be required to manufacture their new product, which is estimated to produce sales of $90,000 in new revenues each year. The cost of goods sold to produce these sales (not including depreciation) is estimated at 43% of sales, and the tax rate at this firm is 39%. If straight-line depreciation is used to calculate annual depreciation, what...
You are considering a 4-year project to start a new line of men’s clothing. Fashion trends change quickly, so you think that by the end of the 4th year, the clothing line will be worthless. You will need to invest $2,000,000 up front in capital expenditures, and you will need a $250,000 investment in net working capital, which will be returned at the end of the project. You expect to sell each item for $275 and plan to sell 5,000...
Smithsonian Co. just acquired for a new project with a 5 year life a new plant for 16,000,000 Euros that it will depreciate straight line in 4 years. The company keeps a constant debt amount (9,648,480 Euro). The project will have a 2,300,000 Euro expected EBIT for each year of the life of the project, a cost of levered equity equal to 15%, a debt-to-equity ratio of 0.75 and a wacc equal to 9.50%. The corporate tax rate is 34%....
ABC Company is considering a new project. The project is expected to generate annual sales of $91,079, variable costs of $26,515, and fixed costs of $12,494. The depreciation expense each year is $17,170 and the tax rate is 37 percent. What is the annual operating cash flow? Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer...
A company is considering a project to enter a new line of business. The new business will require the company to purchase a new machine that will cost $930,000. These costs will be depreciated on a straight-line basis to zero over three years. At the end of three years, the company will get out of the business and will sell the machine at a market value of $70,000. Working capital of $50,000 will be required from the outset, which will...
New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,040,000, and it would cost another $20,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $535,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $13,000. The sprayer would not change...