Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $837,700.00 work cell. Further, it will cost the firm $59,400.00 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 $73,500.00. 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 $6,100.00. Finally, the firm will invest $10,500.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $915,000.00 with expenses estimated at 40.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 38.00%.

The work cell is estimated to have a market value of $453,000.00 at the end of the fourth year. The firm expects to reclaim 87.00% of the final NWC position.

The cost of capital is 13.00%.

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

Answer 1

1. Initial cost= plant &machinery equipment=$837,700+$59,400=$897100

Other cost like traing cost for employees=$73,500

ABC corporation saved $6100 for already existing machinery

Other costs=$73500-$6100=$67,400

Net working capital needed=$10500

Total initial cost (CF0)=$897,100+$67,400+$10,500=$975,000

2.Cash flows and terminal value for Year 1 to Year 4.

For depreciation calculation, we need to take only fixed cost which is a depreciable asset=$897,100

asset life=20 years

depreciation for each year=$897,100/20=$44,855

NPV is $266,209 which is positive and company can accept the project