Question

Green Forest Industrial is considering a project that would last for 2 years. The project would involve an initial investment of 85,000 dollars for new equipment that would be sold for an expected price of 78,000 dollars at the end of the project in 2 years. The equipment would be depreciated to 25,000 dollars over 6 years using straight-line depreciation. In years 1 and 2, relevant annual revenue for the project is expected to be 85,000 dollars per year and relevant annual costs for the project are expected to be 35,000 dollars per year. The tax rate is 50 percent and the cost of capital for the project is 7.06 percent. What is the net present value of the project?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A В C D 1 $85,000.00 $25,000.00 Initial Investment 2 Remaing value at end of life useful life Annual depreciation 4 6 $10,000.00 6 Book value at end of 2nd year Expected sale value at end of 2nd year Expected Capital Gain Tax on Gain (50%) After tax salvage value $65,000.00 $78,000.00 $13,000.00 $6,500.00 $71,500.00 7 9 10 11 12 13 Year 14 2 15 85000 Revenue 85000 16 Cost 35000 35000 Depreciation EBIT Tax(50%) $10,000.00 $10,000.00 $40,000.00 $20,000.00 17 $40,000.00 $20,000.00 18 19 20 $20,000.00 $30,000.00 $71,500.00 $30,000.00 $101,500.00 $20,000.00 $30,000.00 Net Income Operating Cash Flow After tax salvage value After tax net cash flow 21 22 -$85,000.00 23 Cost of capital 25 7.06% 26 Net present value of project $31,576.36 27 28 29 LLI st LC LC

Cell reference -

A В с D E 1 2 Initial Investment 85000 Remaing value at end of life 3 25000 useful life 4 6 Annual depreciation (C2-C3)/ 6 5 6 Book value at end of 2nd year 7 -C2-C5*2 Expected sale value at end of 2nd year Expected Capital Gain Tax on Gain (50%) After tax salvage value 8 78000 9 -С8-С7 =C9*0.5 10 11 ЕС8-С10 12 13 Year 2 14 1 Revenue 15 85000 85000 35000 16 Cost 35000 17 Depreciation -D17 C5 EBIT =D15-D16-D17 -E15-E16-E17 |Тax(50%) -E18*0.5 19 D18*0.5 20 - E18 - E19 Net Income =D18-D19 Operating Cash Flow After tax salvage value 21 D20+D17 =E20+E17 - C11 22 -E21 + E22 -85000 23 After tax net cash flow D21+D22 24 Cost of capital 25 0.0706 26 =C23+NPV(C25,D23:E23) Net present value of project 27 28 29

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