Question

Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $525,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $105,000 at the end of the project in 5 years. Sales would be $355,000 per year, with annual fixed costs of $67,000 and variable costs equal to 37 percent of sales. The project would require an investment of $65,000 in NWC that would be returned at the end of the project. The tax rate is 25 percent and the required return is 9 percent.

Calculate the NPV of this project.

Answer 1

Net Income after tax = (Sales -Fixed cost - Variable cost)*(1-Tax rate)

= (355000- 67000-355000*37%)*(1-0.25)

= 117487.50

NPV

80825.88

Year	Initial cost	Tax shield on depreciation	Net Income after tax	Salvage after tax	NWC	NetCash flow
0	-525000				-65000	-590000
1		131250	117487.5			248737.5
2			117487.5			117487.5
3			117487.5			117487.5
4			117487.5			117487.5
5			117487.5	78750	65000	261237.5
					NPV	80825.88

Book1 Excel Sign in AutoSave Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do File Share Home Wrap Text Calibri Conditional Fornat as Cell Insert Delete Fornat Formatting Table Styles Paste Filter▼ Select Styles Alignment Number Cells Editing Clipboard A2 Year Initia Tax shield on depreciation Net Income after tax Salvage after tax NWC NetCash flow cost 0 525000 -65000SUM(C3:G3) SUM(C4:G4) -SUM(C5:G5) SUM(C6:G6) SUM(C7:G7) -105000*(1-0.25) 65000 SUM(C8:G8) --C3"25% -355000-67000-355000*37%)" (1-0.25) -(355000-67000-355000*37%)*( 1-0.25) -355000-67000-355000*37%)*(1-0.25) -355000-67000-355000*37%)*(1-0.25) -355000-67000-355000*37%)*(1-0.25) 10 -NPV(996,H4:H8HH3 NPV 12 13 14 16 Sheet1 Ready +100% ENG 9:08 AM