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longs inc clothing line has proposed a new project that will have an installation cost og...

longs inc clothing line has proposed a new project that will have an installation cost og $240,000 ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: Longs inc clothing line has proposed a new project that will have an installation cost og $240,00... Longs inc clothing line has proposed a new project that will have an installation cost og $240,000 this cost will be depricted in a straigt line to zero oveer the projects fout year life, and the equipment has no salvage value. the equipment will save the company 99,000 per year in pretax operating costs and the equipment requires an intial investment in Net working capital of $10,000 which will be recouperated at the end. the tax rate is 21% . What is the cash flow from assets for each year of the project years 0-6? what is the npv of the project if the cost of capital is 15%?

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Expert Solution

NPV is the difference of discounted cash-ouflows and discounted cash-inflows. If inflows are greater then the project should be accepted.

Installation cost = $240,000

Life of project = 4 years

Salvage value = 0

Depriciation will be same for 4 years as straight line method is used. It is calculated as below:

Cash-flow of six years will be calculated as below. Since, projects life is 4 years, cash-flow is assumed to be generated for four years. Cash-flow after tax before depriciation is calculated as depriciation is not the real expense for the company. Net working capital is deployed in year 0 and received back in end of the project of year 4. It is treated as cash-flow.

The last line of the table shows cash-flows from the assets.

NPV will be calculated as shown below:

Thus, NPV of the project is $13,872 which is positive amount. Project should be accepted.

jeff jeffy answered 2 years ago
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