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Western Tech is considering a new project that will require $118,000 of fixed assets and net...

Western Tech is considering a new project that will require $118,000 of fixed assets and net working capital of $16,000. The fixed assets will be depreciated on a straight-line basis to a zero salvage value over three years. Ignore bonus depreciation. This project is expected to produce an operating cash flow of $45,000 the first year with that amount decreasing by 5 percent annually for two years before the project is shut down. The fixed assets can be sold for $55,000 at the end of the project and all net working capital will be recovered. What is the net present value of this project at a discount rate of 11.5 percent and a tax rate of 23 percent? Multiple Choice −$3,770.30 −$5,456.32 $3,209.17 $12,136.54 $15,311.09

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Expert Solution

Time line 0 1 2 3
Cost of new machine -118000
Initial working capital -16000
=Initial Investment outlay -134000
100.00%
Depreciation Cost of equipment/no. of years -39333.33 -39333.33 -39333.33 0 =Salvage Value
=after tax operating cash flow 45000 42750 40612.5
reversal of working capital 16000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 42350
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 58350
Total Cash flow for the period -134000 45000 42750 98962.5
Discount factor= (1+discount rate)^corresponding period 1 1.115 1.243225 1.3861959
Discounted CF= Cashflow/discount factor -134000 40358.744 34386.374 71391.426
NPV= Sum of discounted CF= 12136.54

jeff jeffy answered 2 months ago
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