Question

1. XYZ is considering a project with the following data:

Sales Revenue = $500,000

Pre-tax Cannibalization cost = $50,000

Asset Cost = $450,000

Straight line depreciation over 3 years with zero salvage value

Operating costs = $250,000 (does not include depreciation)

Tax Rate 21%

a. What is the after-tax cash flow? Assume a cost of capital of 10% and that the cash flows are constant

for 3 years. What is the NPV?

b. What is the NPV if we need to invest $10,000 in NWC today to open the doors and the NWC will be

recovered in year 3?

Answer 1

$500,000.00 $ (250,000.00) (-) Cannibalization cost (50,000.00) $ (150,000.00 $ 50,000.00 $ (10,500.00) $ 39,500.00 $ 150,000.00 $ 189,500.00 a) Sales revenue (-) Operating cost (-) Depreciation Profit before tax (-) Tax @21% Profit after tax (+) Depreciation Cash flow after tax Cash flow DF 1.00000 $ (450,000.00) 0.90909 172,272.73 0.82645 $ 156,611.57 0.75131 $ 142,374.15 Year Year0 (450,000.00) Year1 189,500.00 Year 2 189,500.00 Year 3 189,500.00 DCF 21,258.45 Net Present Value b) Year Cash flow DF 1.00000 $ (460,000.00) 0.90909 172,272.73 0.82645 $ 156,611.57 0.75131 $ 149,887.30 DCF Year0 $(460,000.00) Year1 189,500.00 Year 2 189,500.00 Year 3 199,500.00 18,771.60 Net Present Value