Question

A capital budgeting replacement project has total installed cost of $100,000 which includes both an additional working capital investment of $15,000 and an after-tax salvage from the old asset of $3,000. The new project is expected to generate annual incremental cash flows after tax of $15,000 for the next 10 years with an expected terminal value at the end of the project of $18,000. The cost of capital of the project is 13% and the firm’s marginal tax rate is 40 percent. Calculate the net present value of the project.

• -$186,696.24
• -$8,884.93
• $20,032.01
• -$13,303.76
• $86,696.24

Answer 1

	i	ii	iii	iv=i+ii+iii	v	vi=iv*v
Year	Cash outflow	Cash inflow	Terminal value	Net cash flow	PVIF @ 13%	present value
0	-100000			-100000	1	(100,000.00)
1		15000		15000	0.88495575	13,274.34
2		15000		15000	0.78314668	11,747.20
3		15000		15000	0.69305016	10,395.75
4		15000		15000	0.61331873	9,199.78
5		15000		15000	0.54275994	8,141.40
6		15000		15000	0.48031853	7,204.78
7		15000		15000	0.42506064	6,375.91
8		15000		15000	0.37615986	5,642.40
9		15000		15000	0.33288483	4,993.27
10		15000	18000	33000	0.29458835	9,721.42
	NPV=					(13,303.76)
	answer =	-13303.76