Question

Tech Enterprises is considering a new project that will require $325,000 for fixed assets, $160,000 for inventory, and $35,000 for accounts receivable. Short-term debt is expected to increase by $100,000. The project has a life of 5 years. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. Ignore bonus depreciation. At the end of the project, the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level. The project is expected to generate annual sales of $554,000 with costs of $430,000. The tax rate is 21 percent and the required rate of return is 15 percent. What is the net present value of this project?

Answer 1

Net present value is calculated as present value of cash inflow less present value of cash outflow
Calculate net present value
Year	0	1	2	3	4	5
Purchase of fixed assets	-$325,000
Working capital (160,000+35,000-100000)	-$95,000
Sales revenue		$554,000	$554,000	$554,000	$554,000	$554,000
Costs		-$430,000	-$430,000	-$430,000	-$430,000	-$430,000
Depreciation (325000/5)		-$65,000	-$65,000	-$65,000	-$65,000	-$65,000
Net income before taxes		$59,000	$59,000	$59,000	$59,000	$59,000
Less: Taxes @ 21%		-$12,390	-$12,390	-$12,390	-$12,390	-$12,390
Net income		$46,610	$46,610	$46,610	$46,610	$46,610
Add: Depreciation		$65,000	$65,000	$65,000	$65,000	$65,000
Operating cash flow		$111,610	$111,610	$111,610	$111,610	$111,610
Salvage value after tax (325000*25%)*(1-0.21)						$64,188
Working capital stated to original						$95,000
Net cash flow	-$420,000	$111,610	$111,610	$111,610	$111,610	$270,798
Discount factor @ 15%	1.00000	0.86957	0.75614	0.65752	0.57175	0.49718
Present value	-$420,000	$97,052	$84,393	$73,385	$63,813	$134,634
Net present value	$33,278.35
Thus, net present value is $33,278.35