Question

g is considering a new average-risk investment project whose data are shown equipment would be depreciated on a straight-line basis with an expected salvage value at the 3-year life. The equipment is expected to be sold at the end of the project's life. 1. Timuran below. The end of the project's require some additional working capital that would be recovered at the end of the revenues and other Timuran would project's life. The Equipment cost Installation & commissioning cost Required new operating working capital:- operating costs are expected to be constant over the project's life. $85.000 S 5.000 $12.000 Inventory Accounts receivable S18,000 Accruals S 2.000 Accounts payable Sales revenues S13.000 $80,000 Operating costs (excluding depreciation) Straight-line depreciation, useful life Estimated salvage value at end of project Tax rate S25,000 years $10,000 35.0% 15.0% Weighted average cost of capital y evaluates all avera ge risk investment proposal using its weighted average cost of capital. compan What is the project's NPV? Is the project viable? Explain.

Answer 1

Statement showing Net Present Value calculation for the project                                    (Amount in $)
Particular	Year	Amount	Present Value Factor at 15%	Present Value
Present Value of Cash Inflow
A. From operation
Cash Profit = (Sale - operating Cost) *(1- tax rate)	1	35,750.00	0.8696	31,086.96
	2	35,750.00	0.7561	27,032.14
	3	35,750.00	0.6575	23,506.21
Total (A)				81,625.30
B. Tax Saving on Depreciation { ($ 5,000 + $ 85,000)/3)
	1	30,000.00	0.8696	26,086.96
	2	30,000.00	0.7561	22,684.31
	3	30,000.00	0.6575	19,725.49
Total (B)				68,496.75
C. Present Value of Salvage Value after tax {$ 10,000 * (1-0.35)}	3	6,500.00	0.6575	4,273.86
Total (C)				4,273.86
D. Working capital recovery	3	45,000.00	0.6575	29,588.23
Total (D)				29,588.23
Total Present Value of Cash Inflow (E) = (A) + (B) + (C) + (D)				1,83,984.14
Present Value of Cash Outflow
Equipment cost including installation and commissioning	0	90,000.00	1.0000	90,000.00
Working capital	0	45,000.00	1.0000	45,000.00
Total Present Value of Cash Outflow (F)				1,35,000.00
Net Present Value (NPV) (E) - (F)				48,984.14

As NPV is $ 48,984.14, Project is viable.