Question

Please Use TI BAII Plus Calculator and Show How You Get the Answer with it.

The Company is evaluating an asset that may increase sales by $120,000 every year for 4 years. There is no expected change in net operating working capital. The company's cost of capital is 6.5%. The proposed asset costs $400,000, will require $20,000 to modify for operations, and falls in the 3-year class MACRS for depreciation rates: .33, .45, .15, and .07 for years 1 through 4, respectively. At the end of the 4 years, it is expected that the asset may sell for $5,000. The company's tax rate is 21%. SHOW ALL WORK.

a) What is the initial outlay for this project?

b) What are the operating cash flows in Years 1 through 4?

c) As part of the terminal cash flow in Year 4, what is the after-tax salvage value of the asset?

d) What is the net present value of this proposed asset investment? Should it be accepted or rejected? SHOW ALL WORK ON THE TI BAII Plus Calculator.

Answer 1

a	The initial outlay of the project
	Asset Cost		400000
	Modification cost		20000
	Initial outlay		420000
b	Operating cashflows
		1	2	3	4
	Additional sales	120000	120000	120000	120000
Less	Depreciation	138600	189000	63000	29400
	Profit	-18600	-69000	57000	90600
	Tax @ 21%			11970	19026
	Net profit	-18600	-69000	45030	71574
Add	Depreciation	138600	189000	63000	29400
	Cashflow	120000	120000	108030	100974
c	After-tax salvage value
	Salvage value		5000
	Book value		0
	Capital Gain		5000
	Tax on gain		1050
	Post-tax Net salvage value		3950
d	Net Present Value
		1	2	3	4
	Cashflow	120000	120000	108030	100974
	Net Salvage Value				3950
	Total cashflow	120000	120000	108030	104924
	PV @ 6.5%	0.94	0.88	0.83	0.78
	Pv of cashflow	112676.06	105799.11	89432.54	81559.85	389467.56
	Net Present Value =		PV of cashflow - Initial Outlay
			-30532.44
	The Project should be rejected because of Negative NPV