Question
In: Finance
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?
Solutions
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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