a-1]
Operating cash flow (OCF) each year = earnings after tax + depreciation
a-2]
In year 5, the entire working capital investment is recovered.
after-tax salvage value = salvage value - tax on sale of equipment (the equipment is depreciated to zero, and hence its book value is zero. The entire salvage value is subject to tax).
Total cash outflow in year 0 = cost of equipment + investment in net working capital.
Total cash inflow in years 1 to 4 = OCF.
Total cash inflow in year 5 = OCF + after-tax salvage value + recovery of net working capital.
NPV is calculated using NPV function in Excel.
NPV is $784,725.96.
b]
Worst case
In the worst case, the initial cost will increase by 15%, the salvage value will decrease by 15%, price will decrease by 10%, and net working capital will increase by 5%.
NPV is -$3,403,907.47
Best case
In the best case, the initial cost will decrease by 15%, the salvage value will increase by 15%, price will increase by 10%, and net working capital will decrease by 5%.
NPV is $4,973,359.39.
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