Question

You can buy a printing press for $80,000. You will have to pay labor costs of $20,000 per year due at the beginning of each year for 6 years. You can print and sell 2,000 books per year and sell each for $60 (at the end of each year). Variable costs are $12 per book. At the beginning of each year, you must have NWC equal to 20% of end-of-year net sales. The net working capital will be recouped when the project is terminated after 6 years. The printing press will depreciate to zero over 10 years. You think you can sell the printing press for $40,000 after 6 years. Tax rate is 35%. What are CF from Assets? What is NPV if interest rate is 8%?

Answer 1

Solution:

INITIAL INVESTMENT
Investment	$80,000
- Tax Credit	$0
Net Investment	$80,000
+ Working Cap Beginning working capital 20% of end of year net sales	$24,000
+ Opportunity Cost	$0
+ Other invest.	$0
Initial Investment	$1,04,000

OPERATING CASHFLOWS( All Amount Figures in $)
YEAR	1	2	3	4	5	6
Revenues( No. of Units* Price per unit)	120000	120000	120000	120000	120000	120000
-Var. Expenses ( No. of Units* variable cost per unit)	24000	24000	24000	24000	24000	24000
- Fixed Expenses	0	0	0	0	0	0
EBITDA(= revenue-var expense- fixed cost)	96000	96000	96000	96000	96000	96000
- Depreciation( 80000-40000)/6=6666.67 each year as per straight line method)	6666.67	6666.67	6666.67	6666.67	6666.67	6666.67
EBIT(=EBITDA-Depreciation)	89333.33	89333.33	89333.33	89333.33	89333.33	89333.33
-Tax@35%	31266.6655	31266.67	31266.67	31266.67	31266.67	31266.67
EBIT(1-t)	58066.6645	58066.66	58066.66	58066.66	58066.66	58066.66
+ Depreciation	6666.67	6666.67	6666.67	6666.67	6666.67	6666.67
- ∂ Work. Cap( working capital is 20% of revenue- since in question its given that we are maintaining working capital equal to 20% of net sales , so if sales have not changed then there is no change in working capital)	0	0	0	0	0	0
NATCF(= EAT+ Deprication- working capital) Total cash flows each year	64733.3345	64733.33	64733.33	64733.33	64733.33	64733.33	64000( This figure is also cash flow in year 6)	=24000+40000( Terminal value 64000 at end of 6 year= working capital released+ salvage value
Discount Factor(=(1+discount rate)^no. of years)	1.08	1.1664	1.259712	1.360489	1.469328	1.586874	1.586874
Discounted CF(=(NATCF/DISCOUNT FACTOR)	59938.2727	55498.4	51387.41	47580.93	44056.42	40792.98	40330.86433
Total discounted cash flows	339585.28
Initial Investment cash flow at 0 year	($1,04,000)
Net Present value(Total discounted cash flows-Initial Investment)	235585.28
Total cash flows from assets after tax for six years	64733.3345	64733.33	64733.33	64733.33	64733.33	128733.33	(Total cash flow in year 6 including terminal value=128733.33=64000+64733)

Hope this resolve your query.