In: Finance
GreenBike considering expanding its bike share factory expansion. The expansion will require new equipment costing $800,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value of the equipment is $150,000. The project requires $60,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $250,000 a year. What is the net present value of this project if the relevant discount rate is 16% and the tax rate is 28%?
Net present value of this project is $ 38,560.40
Present value of operating cash flow | $ 2,50,000.00 | * | 3.274294 | = | $ 8,18,573.41 | ||
Present value of release of working capital | $ 60,000.00 | * | 0.476113 | = | $ 28,566.78 | ||
Present value of after tax salvage value | $ 1,08,000.00 | * | 0.476113 | $ 51,420.21 | |||
Total Present value of cash inflow (a) | $ 8,98,560.40 | ||||||
Plant and equipment cost | $ 8,00,000.00 | ||||||
Working Capital cost | $ 60,000.00 | ||||||
Present value of cash outflow (b) | $ 8,60,000.00 | ||||||
Net Present Value (NPV) (a) - (b) | $ 38,560.40 | ||||||
Working; | |||||||
Present value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | ||||
= | (1-(1+0.16)^-5)/0.16 | i | = | 16% | |||
= | 3.274293654 | n | = | 5 | |||
Present Value of 1 | = | (1+i)^-n | Where, | ||||
= | (1+0.16)^-5 | i | = | 16% | |||
= | 0.476113015 | n | = | 5 | |||
After tax salvage value | = | Before tax sale *(1- Tax rate) | |||||
= | 150000*(1-0.28) | ||||||
= | $ 1,08,000.00 |