Question

You have decided to get into the cotton candy business. A new cotton candy machine will cost $3260 plus $400 shipping. You will have to pay an electrician $60 to hook it up. Initial inventory expenses will be $600.

You expect the machine to return revenues of $3000 each year. Operating expenses should be $750 annually. You will have to purchase a new sugar basket (cost $100) every year after the first year. You expect the to use the machine for three years then sale it for $1000. The machine is depreciated over four years using the straight line depreciation method. Your tax rate is 40% and the company's required return on investment is 10%

If you have a negative Capital Gain then The tax will be negative, that is a deduction) it will be added to the salvage instead of subtracted.

Compute the initial outlay in year Zero ["$4,320", "$5,210", "$4,680"]      

Compute Cash Flows for Year One. ["$1,428", "$1722", "$1,528"]      

Compute the non-operating cash flows ["$1722", "$1,572", "$1,528"]      

Compute the cash flows for year three (OPERATIONAL AND NON OPERATIONAL).   ["$2,972", "$3,528", "$3,234"]      

Compute the NPV. (You're gonna need year 2 for this) ["$1,528", "$1,048", "-$632"]      

Answer 1

Investment in Cotton Candy Machine
Cost of Machine	3,260
Add : Shipping cost	400
Add: Payment to electrician	60
Total Machine cost Capitalized	3,720
Useful life in years	4
Annual SL depreciation	930.00
Tax Rate	40%
Annual Depreciation Tax saving=930*40%=	372
Accumulated depreciation in 3 years	2,790
Written down value after year 3	930
Sale value after 3 years	1,000
Capital gain on sale	70
Tax on Capital gains =70*40%=	28
After Tax salvage value =1000-28=	972

	NPV calculation	Year 0	Year 1	Year 2	Year 3
	Initial Investment
	Cost of Machine	(3,720)
	Investment in NWC	(600)
a	Total Initial Investment	(4,320)
	Operating cash flow
	Annual Revenue		3,000	3,000	3,000
	Annual Operating expense		750	750	750
	Annual Cost of Sugar basket		-	100	100
	Before Tax income (w/o depreciation)	-	2,250	2,150	2,150
	Tax @40%	-	900	860	860
	Annual After Tax income	-	1,350	1,290	1,290
	Add Annual Depreciation Tax saving		372	372	372
b	Total Operating Cash flow Year 1		1,722	1,662	1,662
c	Terminal Cash flow
	Salvage value after Tax				972
	Return of NWC				600
d	Total Terminal Non operating cash flow				1,572
e	Total Free Cash flow from Project=a+b+c	(4,320)	1,722	1,662	3,234
f	PV factor @10% =1/1.1^n	1	0.9091	0.8264	0.7513
g	PV of FCF =e*f=	(4,320.00)	1,565.45	1,373.55	2,429.75
h	NPV =Sum of PV of FCF	1,048

Initial Outlay in Year Zero =	$           (4,320.00)
Cash flow for year 1	$             1,722.00
Non operating cash flow	$             1,572.00
Total Cash flow for year 3	$             3,234.00
Project NPV =	$                  1,048