Question

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $203,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $140,000, variable costs of $37,900, and fixed costs of $13,050. The project will also require net working capital of $3,650 that will be returned at the end of the project. The company has a tax rate of 40 percent and the project's required return is 11 percent. What is the net present value of this project?

Answer 1

Step-1:Calculation of Operating cash flow for the year
	Year	1	2	3	4
	Sales	$         1,40,000	$   1,40,000	$   1,40,000	$   1,40,000
	Variable cost	-37,900	-37,900	-37,900	-37,900
	Fixed Costs	-13,050	-13,050	-13,050	-13,050
	Depreciation	-67,660	-90,234	-30,064	-15,042
	Profit Before tax	21,390	-1,184	58,986	74,008
	Tax Expense	-8,556	473	-23,594	-29,603
	Net Income	12,834	-710	35,391	44,405
	Depreciation	67,660	90,234	30,064	15,042
	Operating cash flow	80,494	89,523	65,456	59,447
	Working:
	Depreciation Schedule:
	Year	Cost	Depreciation rate		Dereciation Expense
	1	2,03,000	33.33%		67,660
	2	2,03,000	44.45%		90,234
	3	2,03,000	14.81%		30,064
	4	2,03,000	7.41%		15,042
Step-2:Calculation of net present value
	Year	0	1	2	3	4		Total
	Operating cash flow		$       80,494	$       89,523	$       65,456	$       59,447
	Fixed Asset	$       -2,03,000
	Net Working capital	$             -3,650
	Release of net working capital					$         3,650
	Cash flow	$       -2,06,650	$       80,494	$       89,523	$       65,456	$       63,097
	Discount factor	1.0000	0.9009	0.8116	0.7312	0.6587
	Present Value	$       -2,06,650	$       72,517	$       72,659	$       47,861	$       41,564		$ 27,951
Thus,
	Net Present Value is	$ 27,951