In: Finance

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).

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 Y_{1} = 8878/
(1+1.12)^{1} = $ 7926

Y_{2} =10319 / (1+1.12)^{2} = $
8227

Y_{3} =7959 / (1+1.12)^{3} = $ 5665

Y_{4} =6709/ (1+1.12)^{4} = $ 4263

Total Present value of Cash Flows = $ 26081.35

Net Present Value =- $ 23870 - $ 26081.35

= $ 2211.35

(a) The manufacturing firm Rebo is considering a new capital
investment project. The project will last for five years. The
anticipated sales revenue from the project is $3 million in year 1
and $4.2 million in each of years 2 – 5. The cost of materials and
labour is 50% of sales revenue and other expenses are $1 million in
each year. The project will require working capital investment
equal to 20% of the expected sales revenue for each year....

The manufacturing firm Rebo is considering a new capital
investment project. The project will last for five years. The
anticipated sales revenue from the project is $3 million in year 1
and $4.2 million in each of years 2 – 5. The cost of materials and
labour is 50% of sales revenue and other expenses are $1 million in
each year. The project will require working capital investment
equal to 20% of the expected sales revenue for each year. This...

The manufacturing firm Rebo is considering a new capital
investment project. The project will last for five years. The
anticipated sales revenue from the project is $3 million in year 1
and $4.2 million in each of years 2 – 5. The cost of materials and
labour is 50% of sales revenue and other expenses are $1 million in
each year. The project will require working capital investment
equal to 20% of the expected sales revenue for each year. This...

The manufacturing firm Rebo is considering a new capital
investment project. The project will last for five years. The
anticipated sales revenue from the project is $3 million in year 1
and $4.2 million in each of years 2 – 5. The cost of materials and
labour is 50% of sales revenue and other expenses are $1 million in
each year. The project will require working capital investment
equal to 20% of the expected sales revenue for each year. This...

(a) The manufacturing firm Rebo is considering a new capital
investment project. The project will last for five years. The
anticipated sales revenue from the project is $3 million in year 1
and $4.2 million in each of years 2 – 5. The cost of materials and
labour is 50% of sales revenue and other expenses are $1 million in
each year. The project will require working capital investment
equal to 20% of the expected sales revenue for each year....

the manufacturing firm Rebo is considering a new capital
investment project. The project will last for five years. The
anticipated sales revenue from the project is $3 million in year 1
and $4.2 million in each of years 2 – 5. The cost of materials and
labour is 50% of sales revenue and other expenses are $1 million in
each year. The project will require working capital investment
equal to 20% of the expected sales revenue for each year. This...

(a) The manufacturing firm Rebo is considering a new capital
investment project. The project will last for five years. The
anticipated sales revenue from the project is $3 million in year 1
and $4.2 million in each of years 2 – 5. The cost of materials and
labour is 50% of sales revenue and other expenses are $1 million in
each year. The project will require working capital investment
equal to 20% of the expected sales revenue for each year....

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