Question

3. A project has the following characteristics:

Initial investment is $1,700,000

Initial investment is depreciated to $0 over its 10 year life

Project generates incremental after-tax cash flows (OCF) of $325,000 per year over the projects life

Project requires a net working capital (NWC) investment today of $50,000, which is recovered at the end of the project

Assets purchased with the initial investment are expected to have a salvage value of $74,000 at the end of the project

The firm faces a 28% tax rate

The firm requires an effective annual return of 12% on this investment.

Answer 1

Based on the given data, pls find below steps, workings and answers:

The NPV of this Project is $ 388526.50 and the IRR is 17.11%; Hence, this project is recommended for investment.

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;