Question

Consider the following project of Hand Clapper, Inc. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.3 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,030,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $13.5 million in pretax revenues with $5.4 million in total pretax operating costs. The tax rate is 38 percent and the discount rate is 13 percent. The market value of the equipment over the life of the project is as follows:

  

Year	Market Value (millions)
1		$	14.30
2			11.30
3			8.80
4			2.15

  

a.	Assuming the company operates this project for four years, what is the NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

   

NPV

$

  

b-1	Compute the project NPV assuming the project is abandoned after one year. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

b-2	Compute the project NPV assuming the project is abandoned after two years. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

b-3	Compute the project NPV assuming the project is abandoned after three years. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

Answer 1

a:

NPV	3663036.00

b-1

NPV	1353185.84

b-2

NPV	2506690.42

b-3

NPV	3897824.76

Workings

A	Year	Initial cost	Working capital	Tax shield	market value	Net revenue after tax	Net Cash flow
	0	-16300000	-1030000				-17330000
	1			1548500		5022000	6570500
	2			1548500		5022000	6570500
	3			1548500		5022000	6570500
	4.00		1030000	1548500	1333000	5022000	8933500
						NPV	3663036.00
B-1	Year	Initial cost	Working capital	Tax shield	market value	Net revenue after tax	Net Cash flow
	0	-16300000	-1030000				-17330000
	1		1030000	6194000	8866000	5022000	21112000
						NPV	1353185.84
B-2	Year	Initial cost	Working capital	Tax shield	market value	Net revenue after tax	Net Cash flow
	0	-16300000	-1030000				-17330000
	1			3097000		5022000	8119000
	2		1030000	3097000	7006000	5022000	16155000
						NPV	2506690.42
B-3	Year	Initial cost	Working capital	Tax shield	market value	Net revenue after tax	Net Cash flow
	0	-16300000	-1030000				-17330000
	1			2064667		5022000	7086666.667
	2			2064667		5022000	7086666.667
	3		1030000	2064667	5456000	5022000	13572666.67
						NPV	3897824.76

AutoSave of H D Book1 - Excel Sign in File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do Share Comments = = insert E 48 O - A A - A- Calibri -9 BIU - Font = E Paste aby 3- to General $ -% Number Fase Conditional Format as Formatting Table - . Delete - Format Cell Styles Sort & Find & Filter - Select Editing Clipboard Alignment Styles Cells D3 KA N 1 2 A B C D E A Year Initial cost Working capital Tax shield market value 0 -16300000 -1030000 1=38%* 16300000/4 =38%* 16300000/4 -38%*16300000/4 -D2 -38%*16300000/4 =2150000*(1-38%) et revenue after tax Net Cash flow SUM(C2:2) =(13500000-5400000)*(1-38%) =SUM(C3:63) =(13500000-5400000)*(1-38%) =SUM(C4:G4) - (13500000-5400000)*(1-38%) -SUM(CS:G5) (13500000 5400000)*(1-38%) SUM(C6:46) NPV -NPV(13%,H3:16)+H2 10 B-1 Year Initial cost Working capital Tax shield market value Net revenue after tax Net Cash flow 11 0 -16300000 -1030000 SUM(C11:G11) 12 --011 -38%16300000/1 =14300000*(1-38%) =(13500000-5400000)*(1-38%) =SUM(C12:12) NPV =NPV(13%,H12) H11 16 17 18 B-2 Year Initial cost Working capital Tax shield 0 -16300000 -1030000 -38% 16300000/2 -38%*16300000/2 market value market value Net revenue after tax Net Cash flow SUM(C1/617) =(13500000-5400000)*(1-38%) =SUM(C18:18) 11300000*(1-38%) -(13500000-5400000)*(1-38%) SUM(C19:19) 20 B-3 Year Initial cost Working capital Tax shield market value 0 16300000 1030000 =38%*16300000/3 =38%*16300000/3 =-D23 =38% 16300000/3 +8800000"(1-38%) NPV =NPV(13%,H18:119)+H17 Nel revenue after lax Net Cash flow SUM(C23:623) (13500000 5400000)*(1 38%) =SUM(C24:24) = (13500000-5400000)*(1-38%) =SUM(C25:625) =(13500000-5400000)*(1-38%) =SUM(C26:326) NPV =NPV(13%,H24:H27)+H23