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You can buy a printing press for $80,000. You will have to pay labor costs of...
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%? (Do not use excel)
Solutions
Expert Solution
| Calculation of Cash Flow and NPV | |||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Elling of Books | - | 2,000 | 2,000 | 2,000 | 2,000 | 2,000 | 2,000 |
| Selling Price | $ - | $ 60 | $ 60 | $ 60 | $ 60 | $ 60 | $ 60 |
| Less : variable Cost | $ - | $ 12 | $ 12 | $ 12 | $ 12 | $ 12 | $ 12 |
| Contribution Per unit | $ - | $ 48 | $ 48 | $ 48 | $ 48 | $ 48 | $ 48 |
| Total Contribution | $ - | $ 96,000 | $ 96,000 | $ 96,000 | $ 96,000 | $ 96,000 | $ 96,000 |
| Less :Labour Cost | $ 20,000 | $ 20,000 | $ 20,000 | $ 20,000 | $ 20,000 | $ 20,000 | $ - |
| Less : Depreciation | $ - | $ 8,000 | $ 8,000 | $ 8,000 | $ 8,000 | $ 8,000 | $ 8,000 |
| Less : Tax | $ - | $ 23,800 | $ 23,800 | $ 23,800 | $ 23,800 | $ 23,800 | $ 23,800 |
| EAT | $ (20,000) | $ 44,200 | $ 44,200 | $ 44,200 | $ 44,200 | $ 44,200 | $ 64,200 |
| Add : Depreciation | $ - | $ 8,000 | $ 8,000 | $ 8,000 | $ 8,000 | $ 8,000 | $ 8,000 |
| Cash Flow From Operation | $ (20,000) | $ 52,200 | $ 52,200 | $ 52,200 | $ 52,200 | $ 52,200 | $ 72,200 |
| Less : Initial Cost of Machine | $ 80,000 | $ - | $ - | $ - | $ - | $ - | $ - |
| Less : Increase in Working Capital | $ 24,000 | $ - | $ - | $ - | $ - | $ - | $ - |
| Add : Release of of working Capital | $ - | $ - | $ - | $ - | $ - | $ - | $ 24,000 |
| Add : Salvage Value | $ - | $ - | $ - | $ - | $ - | $ - | $ 37,200 |
| Net Cash Flow | $ (124,000) | $ 52,200 | $ 52,200 | $ 52,200 | $ 52,200 | $ 52,200 | $ 133,400 |
| DF @8% | 1.0000 | 0.9259 | 0.8573 | 0.7938 | 0.7350 | 0.6806 | 0.6302 |
| PV | $ (124,000.00) | $ 48,333.33 | $ 44,753.09 | $ 41,438.04 | $ 38,368.56 | $ 35,526.44 | $ 84,064.63 |
| Net Present Value | $ 84,419.46 | ||||||
| calculation of Tax | |||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Total Contribution | $ - | $ 96,000.00 | $ 96,000.00 | $ 96,000.00 | $ 96,000.00 | $ 96,000.00 | $ 96,000.00 |
| Less : Depreciation | $ - | $ 8,000.00 | $ 8,000.00 | $ 8,000.00 | $ 8,000.00 | $ 8,000.00 | $ 8,000.00 |
| Less : Labour Cost* | $ - | $ 20,000.00 | $ 20,000.00 | $ 20,000.00 | $ 20,000.00 | $ 20,000.00 | $ 20,000.00 |
| EBT | $ - | $ 68,000.00 | $ 68,000.00 | $ 68,000.00 | $ 68,000.00 | $ 68,000.00 | $ 68,000.00 |
| Tax @ 35% | $ - | $ 23,800.00 | $ 23,800.00 | $ 23,800.00 | $ 23,800.00 | $ 23,800.00 | $ 23,800.00 |
| *Labour cost paid at the beginning of the year but we can get tax benefit at the end of year. |
| Calculation of Depreciation | |
| Cost of Machine | $ 80,000.00 |
| Years | 10 |
| Depreciation | $ 8,000.00 |
Calculation of Increase in
Working Capital
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