Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $755,800.00 work cell. Further, it will cost the firm $51,300.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $68,100.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $5,800.00. Finally, the firm will invest $10,300.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $907,000.00 with expenses estimated at 36.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 36.00%.

The work cell is estimated to have a market value of $466,000.00 at the end of the fourth year. The firm expects to reclaim 86.00% of the final NWC position.

The cost of capital is 11.00%.

What is the terminal cash flow for the project?

What is the NPV the project if we end the project after 4 years?

Answer 1

A. Calculation of NPV of the project :

• Terminal cash flow for the project is $ 860,893.

Working Note 1: Calculation of cash flow after tax :

Working Note 2: Calculation of depreciation to be charged on machinery :

Conclusin: The project should be accepted as it has positive NPV.

Note: The capital loss on sale of work cell has been assumed that not subject tax and no tax shield on loss has been calculated.