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GreenBike considering expanding its bike share factory expansion. The expansion will require new equipment costing $800,000...

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%?

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Expert Solution

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

jeff jeffy answered 5 months ago
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