Question

What is the NPV for a project with the following characteristics? Initial investment is $1,700,000 Initial investment is depreciated to $0 over its 10 year life Project generates incremental after-tax cash flows (OCF) of $325,000 per year over the projects life Project requires a net working capital (NWC) investment today of $40,000, which is recovered at the end of the project Assets purchased with the initial investment are expected to have a salvage value of $62,000 at the end of the project The firm faces a 28% tax rate The firm requires an effective annual return of 12% on this investment

Answer 1

Inital Investment = $ 1,700,000

Net Working Capital = $ 40,000

Total Cash Outflow = $ 1,740,000

Incremental Cash Inflow after Tax for year 1 to 10 = $3,25,000

Add ; Tax@ 28%($3,25000/72%)*28% = $1,26,389

Incremental Cash flow before tax = $4,51,389

Less; Depreciation ($1,700,000/10) = $1,70,000

Incremental Cash flow before tax but after depreciation = $ 2,81,389

Less; Tax@28% = $78,789

Incremental Cash flow after tax = $2,02,600

Add; Depreciation = $ 1,70,000

Incremental Cash flow after tax = $ 3,72,600

Calculation of Present value of Cash inflow

Particular Amount Pvfactor@12% Present value

A.Incremental cash inflow after tax    = $ 3,72,600 5.650 $ 21,05,273

( pv factor for year 1 to 10 )

B.Net Working Capital = $ 40,000 0.322 $12,880

C.Salvage Value = $ 62,000 0.322 $19964

TOTAL Present Value of Cashflow ( A + B+C ) = $ 21,38,117

NPV = Present Value of Cashflow - Initial Outflow = $ 21,38,117 - $ 1,740,000 = $ 3,98,117

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