Question

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $665,000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $176,000 at the end of the project. The project requires $46,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $151,600 a year. What is the net present value of this project if the relevant discount rate is 12 percent and the tax rate is 40 percent?

?$10,905

?$12,925

?$9,815

–$11,632

?$13,919

Answer 1

?$10,905

Working:

Net Present Value is calculated as follows:
Year	0	1	2	3	4	5	6	Total
Operating cash flow		$       1,51,600	$    1,51,600	$    1,51,600	$    1,51,600	$    1,51,600	$ 1,51,600
Investment in new fixed assets	$    -6,65,000
Investment in net working capital	$       -46,000
Release of net working capital							$     46,000
After tax sael of equipment							$ 1,05,600
Total cash flow	$    -7,11,000	$       1,51,600	$    1,51,600	$    1,51,600	$    1,51,600	$    1,51,600	$ 3,03,200
Discount factor @ 12%	1.0000	0.8929	0.7972	0.7118	0.6355	0.5674	0.5066
Present Value	$    -7,11,000	$       1,35,357	$    1,20,855	$    1,07,906	$       96,345	$       86,022	$ 1,53,611	$     -10,905
Working;
After tax sale proceeds	=	$       1,76,000	x	(1-0.40)	=	$    1,05,600