Question

Expansion project NPV  

Get the depreciation using the MACRS table provided in the question.

		0	1	2	3	4
Cost		(650,000)
Inventory		(55,000)
Accounts Payable		20,000
Sales			300,000	300,000	300,000	300,000
Operating Cost			(150,000)	(150,000)	(150,000)	(150,000)
Deprecition			(214,500)	(292,500)	(97,500)	(45,500)
EBT			(64,500)	(142,500)	52,500	104,500
Tax	30%		(19,350)	(42,750)	15,750	31,350
NI			(45,150)	(99,750)	36,750	73,150
+ Deprection			214,500	292,500	97,500	45,500
After-tax salvage Value						21,000
Return NWC						35,000
After-tax CF		(685,000)	169,350	192,750	134,250	174,650

Note in Year 4 $35,000 of working capital is recovered plus the after tax salvage value of $21,000.

Enter the cash flows into the cash flow register and solve for the NPV using the WACC of 11%.NPV = $(162,782);  IRR = -0.83%

• MIRR= __________3.72%_________

• Payback = _____________4.00__________________

Answer 1

		0	1	2	3	4
Cost		(650,000)
Inventory		(55,000)
Accounts Payable		20,000
Sales			300,000	300,000	300,000	300,000
Operating Cost			(150,000)	$     -1,50,000.00	$    -1,50,000.00	$      -1,50,000.00
Deprecition			(214,500)	$     -2,92,500.00	(97,500)	(45,500)
EBT			(64,500)	$     -1,42,500.00	52,500	104,500
Tax	30%		(19,350)	(42,750)	15,750	31,350
NI			(45,150)	(99,750)	36,750	73,150
+ Deprection			214,500	292,500	97,500	45,500
After-tax salvage Value						21,000
Return NWC						35,000
After-tax CF		(685,000)	$     1,69,350.00	$       1,92,750.00	$      1,34,250.00	$       1,74,650.00
The first step is to compound all intervening cash flows to t4 [end of project] and find their sum.
FVIF at 11%			1.36763	1.23210	1.11000	1.00000
			[1.11^3]	[1.11^2]	[1.11]
FV at 11%			$          2,31,608	$            2,37,487	$           1,49,018	$            1,74,650
Sum of FVs =						$            7,92,763
Now we have only two cash flows--the initial investment of 685000 and the cumulative FV of
intervening cash flows amounting to 792763 at t4
The MIRR is that discount rate which equals these two cash flows.
So, 685000 = 792763/(1+MIRR)^4
MIRR = (792763/685000)^(1/4)-1 =			3.72%