Question

Paccione Paving is considering purchasing a unique piece of equipment for a road construction project that will last five years. At the end of the five-year project, Paccione will no longer need the equipment. The equipment will cost $1,225,000, will be depreciated straight-line over seven years, and will be sold for $415,000 at the end of the project. The project will generate additional revenues of $750,000 with annual expenses of $165,000. The project will require an initial investment in net working capital of $85,000. Paccione is in the 20 percent tax bracket and requires a 15 percent return on projects. Copyright © by Jarrod Johnston All Rights Reserved. What is the project NPV? Round your answer to the nearest whole number and no commas. Answer:

Answer 1

Solution :-

Depreciation every year = $1,225,000 / 7 = $175,000

Now Book Value after 5 Years = $1,225,000 - ( $175,000 * 5 ) = $350,000

Sale Value = $415,000

Gain on Sale = $415,000 - $350,00 = $65,000

Tax on Gain on Sale = $65,000 * 0.20 = $13,000

After tax Salvage Value = $415,000 - $13,000 = $402,000

L6 fox A B с D E F G H Solution :- 2 0 1 2 3 4 5 ($1,225,000) 3 Year 4 Initial Cost 5 Annual Revenues 6 Less :- Annual Exps 7 Less :- Depreciation 8 Taxable Income 9 Less :- Tax @ 20% 10 After tax Income 11 Add :- Depreciation 12 Add :- After tax Salvage Value 13 Working Capital 14 15 Net Cash flows 16 17 PVF @ 15% 18 19 PV of Cash flows $750,000 $165,000 $175,000 $410,000 $82,000.0 $328,000.0 $175,000 $750,000 $165,000 $175,000 $410,000 $82,000.0 $328,000.0 $175,000 $750,000 $165,000 $175,000 $410,000 $82,000.0 $328,000.0 $175,000 $750,000 $165,000 $175,000 $410,000 $82,000.0 $328,000.0 $175,000 $750,000 $165,000 $175,000 $410,000 $82,000.0 $328,000.0 $175,000 $402,000 $85,000 ($85,000) ($1,310,000) $503,000.0 $503,000.0 $503,000.0 $503,000.0 $990,000.0 1.000 0.870 0.756 0.658 0.572 0.497 ($1,310,000.00) $437,391.30 $380,340.26 $330,730.66 $287,591.88 $492,204.97 20 $618,259.08 21 Net Present Value 22 23

B21 fx =SUM(B19:G19) A B с D E F G 1 Solution :- 2 3 Year lo 1 2 3 4 5 -1225000 6. 750000 165000 175000 =C5-C6-C7 =C8*0.2 750000 165000 175000 =D5-D6-07 =D8*0.2 750000 165000 175000 =E5-E6-E7 =E8*0.2 =E8-E9 =E7 750000 165000 175000 =F5-F6-F7 =F8*0.2 750000 165000 175000 =G5-G6-G7 =G8*0.2 =G8-G9 =C8-C9 4 Initial Cost 5 Annual Revenues Less :- Annual Exps 7 Less :- Depreciation 8 Taxable income 9 Less :- Tax @ 20% 10 After tax Income 11 Add :- Depreciation 12 Add:- After tax Salvage Value 13 Working Capital 14 15 Net Cash flows 16 17 PVF @ 15% 18 =F8-F9 =D8-D9 =D7 =C7 =F7 =G7 402000 85000 -85000 =B13+B4 =C10+C11 =D10+D11 =E10+E11 =F10+F11 =SUM(G10:13) 1 =B17/1.15 =C17/1.15 =D17/1.15 =E17/1.15 =F17/1.15 19 PV of Cash flows =B15*B17 =C15*C17 =D15*D17 =E15*E17 =F15*F17 =G15*G17 20 21 Net Present Value =SUM(B19:19) 22 23 to window
Therefore Project NPV = $618,259.08

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