Question

Crete Logistics is thinking of opening a new warehouse, and the key data are shown below. The company will be leasing the building at a cost of $2,000 per month. The equipment for the project would be depreciated by the straight-line method over the project's 4-year life to a salvage value of zero, but you estimate the equipment's true salvage value is $10,000. New working capital of $15,000 would be required, and revenues and other operating costs would be constant over the project's 4-year life.

WACC	10.0%
Equipment Cost	$65,000
Sales revenues, each year	$123,000
Annual Operating Cost (including lease payment and excluding depreciation)	$49,000
Tax rate	35%

What is the project's NPV?  

Answer 1

Initial investment = Cost of equipment + Working capital investment

                         = $ 65,000 + $ 15,000 = $ 80,000

Computation of annual cash flow:

Annual depreciation = Cost of equipment/Number of useful lives

                                 = $ 65,000/4 = $ 16,250

Annual revenue	$123,000
Less: Operating Cost	$49,000
Operating profit	$74,000
Less: Depreciation	$16,250
PBT	$57,750
Less: Tax @ 35 %	$20,212.50
Net profit	$37,537.50
Add: Depreciation	$16,250
Annual cash flow	$53,787.50

Cash flow through year 1 to 3 is $ 53,787.50

Cash flow for year 4 = Annual cash flow +Salvage value x (1-Tax rate) + Working capital release

                               = $ 53,787.50 + $ 10,000 x (1-0.35) + $ 15,000

                               = $ 53,787.50 + ($ 10,000 x 0.65) + $ 15,000

                               = $ 53,787.50 + $ 6,500 + $ 15,000 = $ 75,287.50

Computation of NPV:
NPV = PV of future cash flows – Initial investment

Year	Cash Flow (C)	Computation of PV factor	PV factor @ 10 % (F)	PV (C x F)
0	($80,000)	1/(1+0.1)0	1	($80,000.0000)
1	$53,787.50	1/(1+0.1) 1	0.90909090909091	$48,897.7273
2	$53,787.50	1/(1+0.1) 2	0.82644628099174	$44,452.4793
3	$53,787.50	1/(1+0.1)3	0.75131480090158	$40,411.3449
4	$75,287.50	1/(1+0.1) 4	0.68301345536507	$51,422.3755
			NPV	$105,183.9270

NPV of the project is $ 105,183.9270 or $ 105,183.93