Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $796,900.00 work cell. Further, it will cost the firm $57,100.00 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 $58,400.00. 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 $5,400.00. Finally, the firm will invest $11,200.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $901,000.00 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 $450,000.00 at the end of the fourth year. The firm expects to reclaim 87.00% of the final NWC position.

The cost of capital is 14.00%.

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

Net operating profit after tax= (Revenue - cost) * (1-tax rate)

= (901000- 0.36*901000) *(1-0.36) = $ 369,049.6

Initial investment= Working cell purchase + Installation cost + employee training cost - existing equipment (since it saves the cost)

    = $ 907,000

Terminal cash flow:-

Assuming the working cell is sold,

Profit = Book Value - Market Value

Book value= Initial purchase cost - Accumulated Depreciation = 796900 - 159380 = $ 637520

Therefore, Profit= 637520 - 450000 = $ 187520

Tax on profit = 0.36*187520 = $ 67507.2

Terminal Cash Flow = $ 819,163.4

NPV = PV of cash flows - initial investment

Cash flow discounted @ 14%     

therefore, NPV = 1408311 - 907000 = $ 501,311