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Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $651,000

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $651,000 that would be depreciated on a straight-line basis to zero over the 5-year life of the project. The equipment will have a market value of $169,000 at the end of the project. The project requires $39,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow $165,300 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 22 percent?

Solutions

Expert Solution

NPV is the difference between present value of cash inflow and present value of cash outflow.

 

Now we will calculate the NPV of given expansion.

Total Machine Cost

-651000

    
Working Capital Infused

-39000

    
Intital Out Lay

-690000

    
       
Free Cash Flow

165300

    
Working Capital Released

39000

    
Salvage After Tax

131820

    
Terminal Cash Flow

336120

    
       
Year Net Inflow PVF at 13% PV

0

-690000

1

-690000

1

165300

0.885

146283.1858

2

165300

0.783

129454.1468

3

165300

0.693

114561.1918

4

165300

0.613

101381.5857

5

336120

0.543

182432.4697
    NPV

-15887

 

The net present value of this project = -$15887.

The net present value of this project = -$15887.

Junaid answered 2 years ago
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