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Dunder-Mifflin is considering opening a new branch in Columbia with an initial fixed asset cost of...

Dunder-Mifflin is considering opening a new branch in Columbia with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project.

At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. What is the NPV of this project if the firm requires a 13.7 percent rate of return? Enter the dollar amount as an integer value (ex. -$5,000.45 as -5000 or +$3,450.70 as 3451).

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Expert Solution

Time line 0 1 2 3 4 5 6 7 8 9 10
Cost of new machine -2460000
Initial working capital -45000
=Initial Investment outlay -2505000
100.00%
Savings 725000 725000 725000 725000 725000 725000 725000 725000 725000 725000
-Depreciation Cost of equipment/no. of years -246000 -246000 -246000 -246000 -246000 -246000 -246000 -246000 -246000 -246000 0 =Salvage Value
=Pretax cash flows 479000 479000 479000 479000 479000 479000 479000 479000 479000 479000
-taxes =(Pretax cash flows)*(1-tax) 311350 311350 311350 311350 311350 311350 311350 311350 311350 311350
+Depreciation 246000 246000 246000 246000 246000 246000 246000 246000 246000 246000
=after tax operating cash flow 557350 557350 557350 557350 557350 557350 557350 557350 557350 557350
reversal of working capital 45000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 195000
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 240000
Total Cash flow for the period -2505000 557350 557350 557350 557350 557350 557350 557350 557350 557350 797350
Discount factor= (1+discount rate)^corresponding period 1 1.137 1.292769 1.469878353 1.671251687 1.9002132 2.1605424 2.456536678 2.7930822 3.175734464 3.61081
Discounted CF= Cashflow/discount factor -2505000 490193.4916 431128.8405 379181.0383 333492.5578 293309.2 257967.63 226884.461 199546.58 175502.7085 220823
NPV= Sum of discounted CF= 503030.00

jeff jeffy answered 4 months ago
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