Question

Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $425,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $25,000 at the end of the project in 5 years. Sales would be $275,000 per year, with annual fixed costs of $47,000 and variable costs equal to 35 percent of sales. The project would require an investment of $25,000 in NWC that would be returned at the end of the project. The tax rate is 22 percent and the required return is 9 percent.

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Years	0	1	2	3	4	5
Cost of New equipment	-425000
Sales		275000	275000	275000	275000	275000
(-) Fixed costs		47000	47000	47000	47000	47000
(-) Variable costs [ 36% of sales ]		96250	96250	96250	96250	96250
(-) Depreciation		425000
Profit before tax		-293250	131750	131750	131750	131750
(-) Taxes @ 22%		-64515.00	28985.00	28985.00	28985.00	28985.00
Net income		-228735.00	102765.00	102765.00	102765.00	102765.00
(+) Depreciation		425000
(+) Net working capital	-25000					25000
(+) After tax salvage value [ 25000*(1-22%) ]					19500
Free cash flow	-450000	196265.00	102765.00	102765.00	102765.00	147265.00
Present value factor @ 9%	1	0.91743119	0.841679993	0.77218348	0.708425211	0.649931386
Present value	-450000.00	180059.63	86495.24	79353.44	72801.32	95712.15
Net present value (NPV)	64421.78