Question

Dysound Inc. is considering a new project. The project will require $325,000 for new fixed assets, $95,000 for additional inventory and accounts receivable (working capital). The project has a 5-year life. The fixed assets belong to a 30% CCA class. At the end of the project there is no salvage cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 38% and the required rate of return is 15%.

A) Find the NPV for the project.

B) Find the PV of the Operating Cash Flow.

C) Find the Project's total cash flow for the 1st year of the project (only year 1).

Answer 1

Cashflows of the project are calculated as given below :

year	0	1	2	3	4	5
Annual Sales		554000	554000	554000	554000	554000
Annual Costs		430000	430000	430000	430000	430000
Depreciation		97500	68250	47775	33442.5	23409.75
EBT		26500	55750	76225	90557.5	100590.25
Less Tax @38%		10070	21185	28965.5	34411.85	38224.295
PAT		16430	34565	47259.5	56145.65	62365.955
Add Depreciation		97500	68250	47775	33442.5	23409.75
Fixed Assests Cost	325000
Net Working capital	95000					95000
Cashflows	-420000	113930	102815	95034.5	89588.15	180775.705

a) NPV

= -420000+113930/1.15 +102815/1.15^2+95034.5/1.15^3+89588.15/1.15^4+180775.71/1.15^5

= - $39601.01

  

b) PV of operating cashflow = 113930/1.15+102815/1.15^2+95034.5/1.15^3+89588.15/1.15^4+180775.71/1.15^5

= $380398.99

c)  Project's total cash flow for the 1st year of the project (only year 1) = $113930 as calculated above