Burger Inc., is looking at a new project that will generate $312 000 in operating cash...

Burger Inc., is looking at a new project that will generate $312 000 in operating cash flows every year for four years. The project requires an investment in a system with an installment cost of $984 000 that will be depreciated straight-line to zero over the project’s four-year life. At the end of the project the system can be sold for $158 000. The system requires an initial investment in net working capital of $28 000 that will be recovered at the end of the project. If the tax rate is 38 percent and the discount rate is 10 percent, what is the NPV of this project?

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Expert Solution

Calculation of the after tax sale proceeds from machine :-

Here machine is fully depreciated to zero, So there is no book value of machine at the time of sale.

Hence the entire proceeds from sale is taxable.

After tax proceeds from sale of machine = 158,000 * (1 - 0.38) = $ 97,960

Calculation of the initial investment :-

Initial investment = Cost of machine + increase in working capital = $ 984,000 + 28,000 = $ 1,012,000

Calculation of the present value of csh flows :-

Years	Operating cashflows	After tax proceeds from sale of old machine	Release of working capital	Total cash flows	PVF@10%	PV of CF
1	312,000			312,000	0.909091	283636.3636
2	312,000			312,000	0.826446	257851.2397
3	312,000			312,000	0.751315	234410.2179
4	312,000	97960	28,000	437,960	0.683013	299132.5729
PV of Cash flows	1,075,030.3941

NPV = Present value of cash inflows - Initial investment = $ 1,075,030.3941 - 1,012,000 = $ 63,030.3941

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jeff jeffy answered 1 year ago

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