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See Income Statement: Sales $825,000 Less:variable cost[(825,000*55)/100] $453,750 Less: fixed cost $187,150 Less: depriciation $91,000 Earnings...

See Income Statement:

Sales $825,000
Less:variable cost[(825,000*55)/100] $453,750
Less: fixed cost $187,150
Less: depriciation $91,000
Earnings before tax(EBT) $93,100
Less:Taxes@35%[(93,100*35)/100] $32,585
Projected net income $60515

If the project costs $2,000,000, lasts for 6 years and the cost of capital is 15%, compute the NPV and IRR for the project.

Solutions

Expert Solution

NPV @15% - ($797,989)

IRR- 3.40%

Calculation of Depreciation-Machinery
Year
1 2 3 4 5 6
Investment 2000000 1909000 1818000 1727000 1636000 1545000
Depreciation Rate
Depreciation 91000 91000 91000 91000 91000 91000
Value at Year End 1909000 1818000 1727000 1636000 1545000 1454000
CASH FLOW CALCULATION OF THE PROJECT
Year
1 2 3 4 5 6
Operating Income After Tax -A 60515 60515 60515 60515 60515 60515
Depreciation-B 91000 91000 91000 91000 91000 91000
Sale of machinery-C* 1454000
Net Cash Flow -D =(A-B+C) 151515 151515 151515 151515 151515 1605515
Cash Flow from Income Side 151515 151515 151515 151515 151515 1605515
* We assume that after 6 years we will be able to sell the machinery at written down value
Calculation of NPV Calculation of NPV Calculation of IRR
Cash Outflow Machiney 2000000 Machinery (2,000,000)
2000000 0 (2,000,000)
Cash In Flow
Year Cash Inflow (A) Discounting Factor @15%-B Discounted Cash Flow-C=(A*B)
1 151515     0.8696             131,752.17 1         151,515
2 151515     0.7561             114,567.11 2         151,515
3 151515     0.6575                99,623.57 3         151,515
4 151515     0.5718                86,629.19 4         151,515
5 151515     0.4972                75,329.73 5 151515
6 1605515     0.4323             694,108.44 6 1605515
         1,202,010.22
NPV of the Project is           (797,989.78) IRR 3.40%
Comments:
The results obtained above are based on the details provided. In case any information not shared may change the result.

jeff jeffy answered 6 months ago
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