In: Finance
18) You are considering investing in a project that increases annual costs $25,000 by per year over the project's 5 year life . The project has an initial cost of $ 500,000 and will be depreciated straight - line over 5 years Assume a 32 % tax bracket and a discount rate of 11 % . Suppose the equipment is sold at the end of year 5 for $ 300,000 , pretax . What is the NPV ?
a)-$317,,818.44
b)-$455,887.34
c)-$243,667.99
d)-$323,497.47
e)-$356,428.12
d)-$323,497.47
Step-1:Calculation of operating cash flow | ||||||
Annual cost | -25000 | |||||
Depreciation expense | $ -1,00,000.00 | |||||
Total cost | -125000 | |||||
Tax saving | 40000 | |||||
After tax cost | -85000 | |||||
Depreciation | $ 1,00,000.00 | |||||
Operating cash flow | $ 15,000.00 | |||||
Working: | ||||||
Straight Line depreciation | = | (Cost - Salvage Value)/Useful Life | ||||
= | (500000-0)/5 | |||||
= | $ 1,00,000.00 | |||||
Step-2:Calculation of NPV | ||||||
Present value of operating cash flow | $ 15,000.00 | * | 3.695897 | = | $ 55,438.46 | |
Present value of after tax sale | $ 2,04,000.00 | * | 0.593451 | = | $ 1,21,064.07 | |
Total Present value of cash inflow | $ 1,76,502.53 | |||||
Less cost of project | $ 5,00,000.00 | |||||
NPV | $ -3,23,497.47 | |||||
Working: | ||||||
After Tax sale | = | 300000*(1-0.32) | ||||
= | $ 2,04,000.00 | |||||
Present value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | |||
= | (1-(1+0.11)^-5)/0.11 | i | 11% | |||
= | 3.695897018 | n | 5 | |||
Present value of 1 | = | (1+i)^-n | ||||
= | (1+0.11)^-5 | |||||
= | 0.593451328 |