Question

A project has an initial requirement of $62532 for equipment. The equipment will be depreciated to a zero book value over the 5-year life of the project. The investment in net working capital will be $24926. All of the net working capital will be recouped at the end of the 5 years. The equipment will have an estimated salvage value of $13096. The annual operating cash flow is $56978. The cost of capital is 14 percent. What is the project’s net present value if the tax rate is 29 percent?

Answer 1

Calculation of NPV:

Step-1 calculation of present value of cash outflows:

  

S.no	particulars	Amount (in $)
1	initial investment	62532
2	investment in working capital	24926
	Net cash outflow	87458

Step-2 calculation of depreciation per year

Depreciation = total value of equipment/ no of years

= 62532/5= $12,506.4

Step-3 calculation of present value of cash inflows:

Note: assuming that the annual operating cash flows includes depreciation and tax treatment.

Cash flows are equal in every year during the life the project

Years	cash flows	discounting factor @14%	Present value
0	87,458	1	(87,458)
1	56978	0.8772	49,981.10
2	56978	0.7695	43,844.57
3	56978	0.6750	38,460.15
4	56978	0.5921	33,736.67
5	56978	0.5194	29,594.37
5	see note-2	5th year terminal cash inflow	17,776.03
	NPV		$125,934.89

Note -2 Calculation of terminal cash inflow:

  

Particulars	amount
Salvage value	13096
Less- tax @29%	(3,797.84)
Net cash flows from salvage	9,298.16
+ Working capital recovered	24,926
Terminal cash inflow	34,224.16
Df at 5 the year @14%	0.5194
Net PV of terminal cashinflow	17,776.03
34,224.16×0.5194