In: Finance
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
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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