Question

Consider the following project for Dawg Incorporated:

YEAR	0	1	2	3	4	5
Sales		$150,000	$150,000	$150,000	$150,000	$150,000
Cost of Goods		$65,000	$65,000	$65,000	$65,000	$65,000
S&A		$30,000	$30,000	$30,000	$30,000	$30,000
Depreciation		$30,000	$30,000	$30,000	$30,000	$30,000
Investment in NWC	$1,000	$500	$500	$500	$500	$500
Investment in Gross PPE	$150,000

The project will last 5 years and has the same risk as the typical Dawg Incorporated project.  The firm has a capital structure of 30.00% debt and 70.00% equity. The cost of debt is 8.00%, while the cost of equity is estimated at 15.00%. The tax rate facing the firm is 30.00%.  There is no reclaimed NWC or NSV at end of year 5.

What is the NPV for this project?

Answer 1

All the formulas and factors are taken into account in the excel sheet

A B. D E F - G H J K 1 M. N O Р 0 1 2 1 2 3 4 5 3 Year Initial investment Net working capital $(150,000.00) Given $ (1,000.00) Given 4 5 6 7 8 9 10 Sales revenue(Units Sold @48) Cost of Goods sold S and A Depreciation NWC 11 12 $ $ 150,000.00 $ 150,000.00 $ 150,000.00 $150,000.00 $ 150,000.00 $ (65,000.00) $ (65,000.00) $ (65,000.00) $ (65,000.00) $ (65,000.00) $ (30,000.00) $ (30,000.00) $ (30,000.00) $ (30,000.00) $ (30,000.00) $ (30,000.00) $ (30,000.00) $ (30,000.00) $ (30,000.00) $ (30,000.00) (500.00 $ (500.00) $ (500.00) $ (500.00) $ (500.00) $ 24,500.00 $ 24,500.00 $ 24,500.00 $ 24,500.00 $ 24,500.00 $ (7,350.00) (7,350.00) $ (7,350.00) $ (7,350.00) $ (7,350.00) $ 17,150.00 17,150.00 $ 17,150.00 $ 17,150.00 $ 17,150.00 $ 30,000.00 $ 30,000.00 $ 30,000.00 $ 30,000.00 $ 30,000.00 $ 47,150.00 $ 47,150.00 $ 47,150.00 $ 47,150.00 $ 47,150.00 Given Given Given Given Sum of all above from revenue EBIT*30% EBIT-Tax Same Add PAT+depreciation EBIT 13 14 15 Tax @30% PAT Add back depreciation Cash flow from operations 16 17 18 WACC 19 1 Cash flow PV factor(1/(1+12.18%)^year PV_CF NPV $(151,000.00) $ 47,150.00 $ 47,150.00 $ 47,150.00 $ 47,150.00 $ 47,150.00 0.8914 0.7946 0.7084 0.6314 0.5629 $(151,000.00) $ 42,030.67 $ 37,467.16 $ 33,399.15 $ 29,772.82 $ 26,540.22 Debt $ 18,210.02 Equity 20 21 22 23 24 25 Weights Cost 30% 8% 70% 15% WACC 12.18% After tax cost 5.600% 15% Wt Debt*Cost Debt*(1-T) + Wt Equity*cost E There was no recovery of working capital