Question

Atlantic Manufacturing is considering a new investment project that will last for four years. The delivered and installed cost of the machine needed for the project is $23577 and it will be depreciated according to the three-year MACRS schedule. The project also requires an initial increase in net working capital of $293. Financial projections for sales and costs are in the table below. In addition, since sales are expected to fluctuate, NWC requirements will also fluctuate. The end-of-year NWC requirements are included below (hint: these NWC capital requirements DO NOT represent the change in NWC for the period). The $0 requirement for NWC at the end of year 4 means that all NWC is recovered by the end of the project. The corporate tax rate is 35% and the required return on the project is 12%.

Year	1	2	3	4
Sales	$11919	$12833	$13526	$10199
Costs	2431	2563	3328	1202
NWC Requirements	333	357	249	0

What is the project’s NPV? (Round answer to 2 decimal places. Do not round intermediate calculations).

Answer 1

Initial Investment Year 0 = $ 23577 + $ 293

= $ 23870

Computation of Depreciation on Machine as per 3Yrs MACRS Schedule :-

Year	Depreciation Rate As per 3Yrs MACRS Schedule ( A)	Depreciation Cost (B = $23577 * A)
1	33.33%	7858.21
2	44.45%	10479.98
3	14.81%	3491.75
4	7.41%	1747.06

Year Wise Computation of Cash Flows (In $) :-

		Year 1	Year 2	Year 3	Year 4
1	Sales (Given)	11919	12833	13526	10199
2	Costs (Given)	2431	2563	3328	1202
3	Depreciation (Calculated Above)	7858	10480	3492	1747
4	Income Before Tax[1-(2+3)]	1630	-210	6706	7250
5	Taxes at 35%	570	-73	2347	2537
6	Cash Flow from Operations [1-(2+5)]	8918	10343	7851	6460
7	Changes in net working capital*	40	24	-108	-249
8	Total Cash Flow (6-7)	8878	10319	7959	6709

* Changes in net working capital is calculated as difference of NWC requirement in current year less NWC requirement in previous year .

For Example Changes in WC for Year 1 = NWC in Year 1 - NWC in Year 0 = $333 - $293 = $40

Using the formula PV = C_n/ (1+r)ⁿ , we find the present value of year wise cash flows ;-

Using Discounted rate r = 12%,

PV of Cash Flow at the end of Y₁ = 8878/ (1+1.12)¹ = $ 7926

Y₂ =10319 / (1+1.12)² =  $ 8227

Y₃ =7959 / (1+1.12)³ = $ 5665

Y₄ =6709/ (1+1.12)⁴ = $ 4263

Total Present value of Cash Flows = $ 26081.35

Net Present Value =- $ 23870 - $ 26081.35   

= $ 2211.35