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​(Calculating NPV​) Doublemeat Palace is considering a new plant for a temporary​ customer, and its finance...

​(Calculating NPV​) Doublemeat Palace is considering a new plant for a temporary​ customer, and its finance department has determined the following characteristics. The company owns much of the plant and equipment to be used for the product. This equipment was originally purchased for​ $90,000; however, if the project is not​ undertaken, this equipment will be sold for $ 30,000 after​ taxes; in​ addition, if the project is not​ accepted, the plant used for the project could be sold for $ 85,000 after taxes-the plant originally cost​ $40,000. The rest of the equipment will need to be purchased at a cost of $ 130,000. This new equipment will be depreciated by the straight line method over the​ project's 3​-year ​life, after which it will have zero salvage value. No change in net operating working capital would be​ required, and management expects revenues resulting from this new project to be $ 222,000 per year for 3 ​years, while increased operating​ expenses, excluding​ depreciation, are expected to be $ 86,000 per year over the​ project's 3​-year life. The average tax rate is 25 percent and the marginal tax rate is 35 percent. The required rate of return for this project is 13 percent. What is the​ project's NPV​?

a. What is the initial outlay associated with this​ project?

b. What are the annual​ after-tax cash flows associated with this project for years 1 and 2​ (note that the cash flows for years 1 and 2 are​ equal)?

c. What is the terminal cash flow in year 3​ (what is the annual​ after-tax cash flow in year 3 plus any additional cash flows associated with the termination of the​ project)?

d. What is the ​project's NPV given a required rate of return of 13 ​percent?

Solutions

Expert Solution

a) Initial outlay for the project = Plant cost + Cost of new equipment = 40,000 + 130,000 = $ 170,000

b) Annual cash flows in year 1 and year 2 = $ 103,567

c) Terminal cashflow in year 3 = $ 103,567( since there is no other cash flow like salvage value of equipment or net working capital recovery)

d) NPV of the project = $ 65.961.69

jeff jeffy answered 6 months ago
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