Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $814,500.00 work cell. Further, it will cost the firm $55,000.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $50,000.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,200.00. Finally, the firm will invest $10,300.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $911,000.00 with expenses estimated at 38.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 36.00%. The work cell is estimated to have a market value of $450,000.00 at the end of the fourth year. The firm expects to reclaim 81.00% of the final NWC position. The cost of capital is 11.00%.

What is the NPV the project if we end the project after 4 years?

Answer 1

1. Initial cost= plant &machinery equipment=$814,500+$55,000=$869,500

Other cost like traing cost for employees=$50,000

ABC corporation saved $5200 for already existing machinery

Other costs=$50,000-$5200=$44,800

Net working capital needed=$10300

Total initial cost (CF0)=$869,500+$44,800+$10,300=$924,600

2.Cash flows and terminal value for Year 1 to Year 4.

For depreciation calculation, we need to take only fixed cost which is a depreciable asset=$869,500

asset life=20 years

depreciation for each year=$869,500/20=$43,475

NPV can be found using EXCEL

NPV(rate, Year 1 to year 4 cash flows)-Total cost.

NPV(11%,Year1 to Year 4 cashflows)-924,600

NPV=$440,654, hence they should accept the project