Question

A 5-yr project has an initial requirement of $145,226 for new equipment and $9,294 for net working capital. The fixed assets will be depreciated to a zero book value over 5 years and have an estimated salvage value of $27,669. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $51,222. The cost of capital is 9% and the tax rate is 27%. What is the net present value of the project?

Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

Answer 1

• We are given the OCF so we dont need to calculate the depreciation
• NPV is calculated below

Year	CF	Remark	Discount Factor		Discounted CF
0	$        -1,54,520.00	Invest in equipment and working capital	1/(1+0.09)^0=	1	1*-154520=	$        -1,54,520.00
1	$             51,222.00	OCF	1/(1+0.09)^1=	0.917431193	0.91743119266055*51222=	$             46,992.66
1	$             51,222.00	OCF	1/(1+0.09)^1=	0.917431193	0.91743119266055*51222=	$             46,992.66
3	$             51,222.00	OCF	1/(1+0.09)^3=	0.77218348	0.772183480061064*51222=	$             39,552.78
4	$             51,222.00	OCF	1/(1+0.09)^4=	0.708425211	0.708425211065196*51222=	$             36,286.96
5	$             51,222.00	OCF	1/(1+0.09)^5=	0.649931386	0.649931386298345*51222=	$             33,290.79
5	$             20,198.37	Salvage value x (1-tax rate)	1/(1+0.09)^5=	0.649931386	0.649931386298345*20198.37=	$             13,127.55
5	$                9,294.00	Working capital investment recovery	1/(1+0.09)^5=	0.649931386	0.649931386298345*9294=	$                6,040.46
					NPV = Sum of all Discounted CF	$             67,763.86

• As the equipment is depreciated to 0, the entire salvage value is profit and it will be taxed, therefore after tax salvage value is the actual cash inflow
• NPV =  67763.86
• As NPV > 0, the project is worth investing