Expected Cash flows
Antico Enterprises is about to begin on another venture. Rodrigo Gonzales, the faithful financial analyst, once again will examine the viability of this venture after 31 failures.
A number of windmills are to be constructedgenerate electricity. They will cost $474,000 and will last 10 years, at which time they will have an estimated salvage value of $24,000. However, a capital upgrade of $105,000 will be required at the end of five years. An inventory of spare parts (working capital) amounting to $11,000 will be required during the term of the venture and will be housed in a warehouse that is currently not being used, but which has been used for Antico's previous ventures. The warehouse could be rented out at $4,000 per year.
This enterprise is expected to generate cash from the sale of electricity of $153,000 a year for 10 years. Cash expenses for each of the 10 years will be $9,000.
The company’s tax rate is 30 percent, the CCA rate is 6 percent and the cost of capital is 23 percent.
Requirements:
A. Calculate the Net Present Value of the Windmill venture by completing the table below:
| Event | Expected Cash Flow | After-tax Cash Flow | Present Value |
|---|---|---|---|
| Enter cash receipts as positive numbers, cash payments as negative numbers. | |||
| Inital Investment | |||
| Working Capital | |||
| Revenues | |||
| Expenses | |||
| Opportunity Cost | |||
| Capital Upgrade | |||
| Salvage | |||
| Working Capital Revcovery | |||
| CCA Tax Shield | N/A | N/A | |
| Net present value | N/A | N/A | |
B. What number did you use for (Cpv - Spv)?
(Enter your answer as a positive number.)
C. Should Antico invest in the Windmill venture?
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