Cody Jackson plans importing olives to sell to restaurants and specialty stores. This venture will require an initial outlay of $295,000 to buy a refrigerated storage unit, which can be depreciated (straight-line) to a salvage value of $110,000 in 15 years. In addition, she will need $60,000 in working capital during the 15 years of the project. Annual sales are estimated to be $202,000 and annual expenses $135,000. She also estimates that the marginal tax rate and RRR will be 25% and 8%, respectively, during the lifetime of project. Using the given information, answer the following questions
a. What is the depreciation amount each year?
b. What is the net cash flow associated with the venture at year
1?
c. What is the amount of tax payment at year 8?
d. What is the net present value (NPV) of the proposed
project?
e. What is the IRR of the project?
f. Should the company accept the project? Justify your answer by
using the IRR of the project.
g. Calculate the net present values of the project (NPV) at the
different RRR. The RRR starts from 0% and increases by 2% until
20%. Paste to the “answer” sheet only the NPV at 10%.
h. Using the answers in the question g, draw a chart that shows the
NPV of the project at different levels of cost of capital. Don’t
forget to give appropriate title and labels of X and Y on the
chart.
Initial cost | a | |||||
Salvage | b | |||||
Life | c | |||||
Dep. | d. NPV | |||||
Working Capital (WC) | e. IRR | |||||
Revenues | f. | |||||
Expences | g | |||||
Tax rate | ||||||
RRR | ||||||
Year | 1-time CF | Rev | Cost | Dep | Taxes | After tax CF |
0 | ||||||
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
9 | ||||||
10 | ||||||
11 | ||||||
12 | ||||||
13 | ||||||
14 | ||||||
15 | ||||||
g | RRR | NPV | ||||
0% | ||||||
2% | ||||||
4% | ||||||
6% | ||||||
8% | ||||||
10% | ||||||
12% | ||||||
14% | ||||||
16% | ||||||
18% | ||||||
20% | ||||||
h |
Answer:
The filled in excel format is as below:
Answer a:
Depreciation amount each year = (Initial cost - Salvage value) /Useful life = ($295,000 -$110,000)/ 15
= $12,333.33
Answer b:
As calculated in above table, net cash flow associated with the venture at year 1 = $53,333.33
Answer C:
As calculated in above table, amount of tax payment in year 8 = $13,666.67
Answer d:
NPV at 8% RRR = $143,607.98
NPV at 10% RRR = $183,049.29
Answer e:
Yes, the project should be accepted. Project's IRR = 13.82%
Answer f:
NPVs are calculated as required and provided in table above.
Answer g:
The chart on NPV profile is as follows:
The excel with 'Show formula'
Cody Jackson plans importing olives to sell to restaurants and specialty stores. This venture will require...
Victoria Korchnoi is thinking of importing caviar to sell to restaurants and specialty stores. She estimates that this venture will require an initial outlay of $600,000 to buy a refrigerated storage unit, which can be depreciated (straight-line) to a salvage value of $100,000 in 15 years. In addition, Ms. Korchnoi estimates that she will need $70,000 in working capital during the 15 years of the project. Annual sales are estimated to be $180,000 and annual expenses $45,000. At the end...
Need to know how to solve with steps. José Garcia is thinking of importing caviar to sell to restaurants and specialty stores. He estimates that this venture will require an initial outlay of $300.000 to buy a refrigerated storage unit, which can be depreciated (straight-line) to salvage value of $50,000 in eight years. In addition, Mr. Garcia estimates that he will need S40.000 in working capital during the eight years of the project. Annual sales are estimated to be $110,000...
Hi, Could you tell me why $60,000 of reduced in working capital is added in the year 0? Thank you very much in advance! in COSIS, dllu mo m Toqun dll dl livestment in net working capital of 650 000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? 14. Project Evaluation IL art Evaluation ILO1] Your firm is contemplating the purchase of a new $425.000 computer-based order...
Calexico Hospital plans to invest in a new MRI machine. The cost of the MRI is $1.8 million. The MRI has an economic life of 5 years, and it will be depreciated over a five-year life to a $400,000 salvage value. Additional revenues attributed to the new MRI will be in the amount of $1.5 million per year for 5 years. Additional operating expenses, excluding depreciation expense, will amount to $1 million per year for 5 years. Over the life...
Sway's Back Store is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a book value of $0.5 million over the 5-year life of the project. Annual sales from this project are estimated at $950,000. The variable cost is 40% of the annual sales and there is an annual fixed cost of $100,000. Sway's Back Store will sell the equipment at the end of the project for a...
IDG is a venture capital fund, based in VN. Currently, this company has access to a list of “potential venture projects”. As the fund’s financial analyst, given the following information for project X, should the fund undertake this venture? To answer, first prepare a pro forma income statement for each year. Next calculate operating cash flow (OCF). Finish the problem by determining total project cash flows for each year and then calculating NPV assuming a 28% required return. Tax rate...
A company is considering a three-year project. New equipment will cost $200,000. The equipment falls in the MACRS three-year class (.3333, .4445, .1481, .0741) it will have a salvage value at the end of the Project of $50,000. The project is expected to produce sales of $100,000 in the first year and sales will increase by $50,000 each year after that. Expenses are expected to be 40% of sales. An investment in net-working capital of $5000 is required at the...
СР, 0 A project's internal rate of return (IRR) is the -Select- that forces the PV of its inflows to equal its cost. The IRR is an estimate of the project's rat of return, and it is comparable to the - Select on a bond. The equation for calculating the IRR is: NPV = CF. + CF + СР + ... + =0 (1 + IRR) (1 + ru (1 + R) CF (1 + IRR) CFt is the expected...
Calexico Hospital plans to invest in a new MRI. The cost of the MRI is $1,800,000. the machine has an economic life of five years, and it will be depreciated over a five-year life to $200,000 salvage value. additional revenues attributed to the new machine will amount to 1,500,000 per year for five years. additional operating costs, excluding depreciation expense will amount to $1,000,000 per year for five years. over the life of the machine, net working capital will increase...
A company is considering a three-year project. New equipment will cost $200,000. The equipment falls in the MACRS three-year class (.3333, .4445, .1481, .0741) it will have a salvage value at the end of the project of $50,000. The project is expected to produce sales of $100,000 in the first year and sales will increase by $50,000 each year after that. Expense are expected to be 40% of sales. An investment in net-working capital of $5,000 is required at the...