Workings to be in 4 decimal place
Answers to be in 4 decimal place
Homework Answers
(i) Calculation of NPV of the proposed Project
| Year 0 | Year 1 | Year 2 | Year 3 | |
| Initial Investment ( 140000 + 30000) | 170000 | |||
| Saving in Pre tax Labour Cost | 50000 | 50000 | 50000 | |
| Sales (Quantity * Selling Price) | 16000 | 20000 | 22000 | |
| Less :Variable cost of Production (Quantity * Variable cost per unit) | 4400 | 5500 | 6050 | |
| Less :Fixed Cost of Production | 1500 | 1500 | 1500 | |
| Less : Depreciation (170000 / 3 ) | 56666.66667 | 56666.66667 | 56666.66667 | |
| Earning before taxes | 3433.33333 | 6333.33333 | 7783.33333 | |
| Taxes @ 40% | -1373.33333 | -2533.33333 | -3113.33333 | |
| Earnings After Taxes | 2060 | 3800 | 4670 | |
| Add : Depreciation | 56666.6667 | 56666.6667 | 56666.6667 | |
| Plus : Salvage Value | 60000 | |||
| Less : tax on salvage @ 40% | 24000 | |||
| NWC | 8500 | |||
| Plus : Recapture of NWC | 8500 | |||
| Operating Cash Flows | 178500 | 58727 | 60467 | 105836.667 |
| PV Factor @ 10% | 1 | 0.9091 | 0.8264 | 0.7513 |
| PV of Net Cash flows (Inflow) | 53387.8788 | 49972.4518 | 79516.6541 | |
| PV of Net Cash flows (Outflow) | 178500 | |||
| The net present value (NPV) of this project is | = $ 4376.9847 | |||
| NPV = PV of cash inflow - PV of cash outflow | ||||
| = 182879.9847- 178500 | ||||
| = $ 4376.9847 | ||||
| Working Note : | ||||
| Book Value = 0 (Since it is fully depreciated | ||||
| Gain on Sale = Salvage Value - Book Value | ||||
| = 60000- 0 | ||||
| = 60000 | ||||
| Tax on Gain on Sale = 60000 * 0.4 = 24000 |
(ii) The project should be accepted as it has positive NPV.
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Workings to be in 4 decimal place
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