Question

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $201,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $138,000, variable costs of $37,300, and fixed costs of $13,000. The project will also require net working capital of $3,600 that will be returned at the end of the project. The company has a tax rate of 35 percent and the project's required return is 10 percent. What is the net present value of this project? Multiple Choice 0 $31,448 0 $35,707 0 $37,105 0 $38,247

Answer 1

Cash flow at year 0 = Cost of Project + Investment in NWC = $201,000 + $3,600 = $204,600

Cash Flow(Year 1) = [(Sales - Variable Costs - Fixed Costs) * (1 - t)] + [Depreciation * t]

= [($138,000 - $37,300 - $13,000) * (1 - 0.35)] + [$201,000 * 0.3333 * 0.35]

= $57,005 + $23,447.655 = $80,452.655

Cash Flow(Year 2) = [(Sales - Variable Costs - Fixed Costs) * (1 - t)] + [Depreciation * t]

= [($138,000 - $37,300 - $13,000) * (1 - 0.35)] + [$201,000 * 0.4445 * 0.35]

= $57,005 + $31,270.575 = $88,275.575

Cash Flow(Year 3) = [(Sales - Variable Costs - Fixed Costs) * (1 - t)] + [Depreciation * t]

= [($138,000 - $37,300 - $13,000) * (1 - 0.35)] + [$201,000 * 0.1481 * 0.35]

= $57,005 + $10,418.835 = $67,423.835

Cash Flow(Year 4) = [(Sales - Variable Costs - Fixed Costs) * (1 - t)] + [Depreciation * t] + Recovery of Investment in NWC

= [($138,000 - $37,300 - $13,000) * (1 - 0.35)] + [$201,000 * 0.0741 * 0.35] + $3,600

= $57,005 + $5,212.935 + $3,600 = $65,817.935

NPV = PV of Cash Inflows - PV of Cash Outflows

= [$80,452.655 / (1 + 0.10)] + [$88,275.575 / (1 + 0.10)²] + [$67,423.835 / (1 + 0.10)³] + [$65,817.935 / (1 + 0.10)⁴] - $204,600
= $73,138.78 + $72,955.02 + $50,656.53 + $44,954.54 - $204,600 = $37,104.86, or $37,105

Hence, 3rd option is correct.