Question

This venture will require an initial outlay of $537,800 to buy a refrigerated storage unit, which can be depreciated (straight-line) to a salvage value of $140,000 in 15 years. In addition, she will need $80,000 in working capital during the 15 years of the project. Annual sales are estimated to be $250,000 and annual expenses $150,000. She also estimates that the marginal tax rate and RRR will be 28% and 8%, respectively, during the lifetime of project. Using the given information, answer the following questions

a. What is the depreciation amount each year?

b. What is the net cash flow associated with the venture at year 1?

c. What is the amount of tax payment at year 8?

d. What is the net present value (NPV) of the proposed project?

e. What is the IRR of the project?

f. Should the company accept the project? Justify your answer by using the IRR of the project.

g. Calculate the net present values of the project (NPV) at the different RRR. The RRR starts from 0% and increases by 2% until 20%. Paste to the “answer” sheet only the NPV at 10%.

h. Using the answers in the question g, draw a chart that shows the NPV of the project at different levels of cost of capital. Don’t forget to give appropriate title and labels of X and Y on the chart.

 

 

Answer 1

Year	0	1-14	15
Initial Investment	-537800
investment in working capital	-80000
annual sales		250000	250000
annual expense		150000	150000
annual depreciation		26250	26250
operating profit		73750	73750
less tax-28%		20650	20650
after tax profit		53100	53100
add depreciation		26250	26250
scrap value of machine			140000
recovery of working capital			80000
net operating cash flow	-617800	79350	299350
Year	cash flow
0	-617800
1	79350
2	79350
3	79350
4	79350
5	79350
6	79350
7	79350
8	79350
9	79350
10	79350
11	79350
12	79350
13	79350
14	79350
15	299350
E- IRR =Using IRR function in MS excel	IRR(G1238:G1253)	10.97%
F-Yes project should be accepted as IRR of the project is 10.97% which is greater than RRR of 8% so as an IRR acceptance rule (IRR>RRR Accept the proposal)Project should accepted for implementation.
G-
NPV at 0% =Using NPV function in MS excel	NPV(0%,G1239:G1253)+G1238	792450.00
NPV at 2% =Using NPV function in MS excel	NPV(2%,G1239:G1253)+G1238	565252.30
NPV at 4% =Using NPV function in MS excel	NPV(4%,G1239:G1253)+G1238	386602.23
NPV at 6% =Using NPV function in MS excel	NPV(6%,G1239:G1253)+G1238	244665.27
NPV at 8% =Using NPV function in MS excel	NPV(8%,G1239:G1253)+G1238	130747.81
NPV at 10% =Using NPV function in MS excel	NPV(10%,G1239:G1253)+G1238	38408.66
NPV at 12% =Using NPV function in MS excel	NPV(12%,G1239:G1253)+G1238	-37164.73
NPV at 14% =Using NPV function in MS excel	NPV(14%,G1239:G1253)+G1238	-99597.74
NPV at 16% =Using NPV function in MS excel	NPV(16%,G1239:G1253)+G1238	-151643.61
NPV at 18% =Using NPV function in MS excel	NPV(18%,G1239:G1253)+G1238	-195409.79
NPV at 20% =Using NPV function in MS excel	NPV(20%,G1239:G1253)+G1238	-232522.04