Question

A project will require $511,800 for manufacturing equipment. The equipment will be depreciated straight-line to a zero book value over the six-year life of the project. At the end of the project, the equipment will be worth about 10 percent of what we paid for it. We will have to invest $47,000 in net working capital at the start. The net working capital will be recovered at the end of the project. The project is expected to generate annual sales of $965,000 and costs of $508,000. The tax rate is 21 percent and the required rate of return is 14.7 percent.

What is the project's NPV?

$989,246

$925,363

$854,324

$878,364

$756,943

Answer 1

Current cash flow = cost of equipment + investent in wrk in capital
=(-511800)+(-47000)
=-$558,800
project cash flow in Year 6
Annual Depreciation = (Cost Of The Asset- Salvage Value)/ Life Of The Asset
= $511800-0/6 years
= $85300 per year
Net Income = (sales - costs - depreciaiton ) * (1- tax rate)
=($965000-508000-85300)*(1-0.21)
=293643
cash flow = net income + depreciaiton
=$293643+85300
=$378943
Net sales value = $51180*(1-0.21)
=$40432.20
Release of working capital =$47000
Total cash flow =378943+40432.20+47000
=466375.2
Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.147^a	d=b*c
0	$   -5,58,800	1	$     -5,58,800.00
1	$    3,78,943	0.87184	$       3,30,377.51
2	$    3,78,943	0.760104	$       2,88,036.19
3	$    3,78,943	0.662689	$       2,51,121.35
4	$    3,78,943	0.577758	$       2,18,937.53
5	$    3,78,943	0.503713	$       1,90,878.41
6	$    4,66,375	0.439157	$       2,04,811.70
NPV			$             9,25,363