Question

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $643,000 that would be depreciated on a straight-line basis to zero over the 4-year life of the project. The equipment will have a market value of $168,000 at the end of the project. The project requires $38,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $197,400 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 35 percent?

?$22,138

?$18,679

–$19,924

?$23,841

?$16,811

Answer 1

?$18,679

Working:

Net Present Value is calculated as follows:
Year	0	1	2	3	4		Total
Operating cash flow		$       1,97,400	$    1,97,400	$    1,97,400	$    1,97,400
Investment in new fixed assets	$    -6,43,000
Investment in net working capital	$       -38,000
Release of net working capital					$       38,000
After tax sale of equipment					$    1,09,200
Total cash flow	$    -6,81,000	$       1,97,400	$    1,97,400	$    1,97,400	$    3,44,600
Discount factor @ 14%	1.0000	0.8772	0.7695	0.6750	0.5921
Present Value	$    -6,81,000	$       1,73,158	$    1,51,893	$    1,33,239	$    2,04,031		$   -18,679
Working;
After tax sale proceeds	=	$       1,68,000	x	(1-0.35)	=	$    1,09,200