Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $813,800.00 work cell. Further, it will cost the firm $58,800.00 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 $64,100.00. 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 $6,300.00. Finally, the firm will invest $10,400.00 in net working capital to ensure the project has sufficient resources to be successful.

The project will generate annual sales of $921,000.00 with expenses estimated at 37.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 39.00%.

The work cell is estimated to have a market value of $473,000.00 at the end of the fourth year. The firm expects to reclaim 82.00% of the final NWC position.

The cost of capital is 11.00%.

What is the cash flow to start the project in year 0?

What is the yearly operating cash flow for the project?

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

Solution

Cash flow to start the project in the year 0

Particulars	Amount
Cost of New Project	$813,800
Add:Setup Cost/Installation cost	$58,800
Add:Increase In Net Working Capital	$10,400
Add:Training Cost for Employees	$64,100
Cash Flow	$9,47,100

Operating cash Flow of the Project

Particulars	Amount
Sales Revenue	$9,21,000
Less:Expenses(37% of sales)	$3,40,770
Earning Before Depreciation and Tax	$5,80,230
Less:Depreciation	$43,315
Earning after tax but before Depreciation	$5,36,915
Less:Tax@39%	$2,09,396
Earning after tax and Depreciation	$3,27,519
Add:Depreciation	$43,315
Operating Cash Flow	$3,70,834

Terminal Cash flow of the Project after 4 Years

Particulars	Amount
Actual Proceed on Disposal of Assets	$4,73,000
Book Value on disposal	$6,40,540
Tax Rate	39%
Tax on Disposal	$50262
After Tax proceed on disposal Machine	$422738
Working Capital	$10400