Question

The Down Towner is considering a project with a life of 4 years that will require $164,800 for fixed assets and $42,400 for net working capital. The fixed assets will be depreciated using the Year 2018 bonus depreciation method. At the end of the project, the fixed assets can be sold for $37,500 cash and the net working capital will return to its original level. The project is expected to generate annual sales of $195,000 and costs of $117,500. The tax rate is 24 percent and the required rate of return is 13 percent. What is the project's net present value? Multiple Choice $46,482.43 $42,316.67 $56,500.00 $59,488.87 $48,909.09

Answer 1

Annual operating cahsflows
Sales			195000
Less: Cost			117500
Pre tax income			77500
Less: Tax @ 24%			18600
After tax income			58900
NPV:
			Year-0	Year-1	Year-2	Year-3	Year-4
Investment of Fixed assets			-164800
Investment of Working capital			-42400
Annual cash flows				58900	58900	58900	58900
Tax shield on dep				39552
(164800*0.24)
Release of Working capital							42400
After tax salvage							28500
(37500-24%)
Net cash flows			-207200	98452	58900	58900	129800
PVF at 13%			1	0.884956	0.783147	0.69305	0.613319
Present value of cashflows			-207200	87125.66	46127.34	40820.65	79608.77
NPV			46482.43
Answer is $ 46482.43