Question

Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $440,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $54,000 at the end of the project in 5 years. Sales would be $287,000 per year, with annual fixed costs of $50,000 and variable costs equal to 37 percent of sales. The project would require an investment of $31,000 in NWC that would be returned at the end of the project. The tax rate is 23 percent and the required return is 10 percent. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Net Income after tax (except depreciation)
Sales			287000
Less: VC (37% of sales)			106190
Less: Fixed cost			50000
Net income before tax			130810
Less: Tax @ 23%			30086.3
Net Income after tax			100723.7
Cashflows of each year
			0	1	2	3	4	5
Initial Investment			-440000
Investment in WC			-31000
Annual Net Income				100723.7	100723.7	100723.7	100723.7	100723.7
Tax shield on dep			101200
(440000*23%)
Release of WC								31000
After tax salvage of FA								41580
(54000-23%)
Annual cash flows(net)			-369800	100723.7	100723.7	100723.7	100723.7	173303.7
PVF at 10%			1	0.909091	0.826446	0.751315	0.683013	0.620921
Present value of cashflows			-369800	91567	83242.73	75675.21	68795.64	107608
NPV			57088.5