Question

In: Finance

A project requires an initial investment of $300,000 and expects to produce an after-tax operating cash...

A project requires an initial investment of $300,000 and expects to produce an after-tax operating cash flow of $150,000 per year for three years. The asset value will be depreciated using straight-line depreciation over three years.At the end of the project, the asset could be sold for a price of $100,000. Assume a 21% tax rate and 15% cost of capital. Calculate the NPV of the project.

Solutions

Expert Solution

- Initial Investment at (t=0) = $300,000

- After-tax Operating cashflow for 3 years = $150,000 per year

After-tax Operating cashflow are already computed after tax and depreciation.

- Salvage Value at year end 3 after tax adjustment = $100,000*(1-0.21%) = $79,000

calculating the NPV of the Project:-

Year Cash Flow of Project ($) (a) PV Factor @15% (b) Present Value of cash Flows of Project ($) [(a)*(b)]
0                           (300,000.00) 1.00000               (300,000.000)
1                             150,000.00 0.86957                  130,434.783
2                             150,000.00 0.75614                  113,421.550
3                             150,000.00 0.65752                    98,627.435
3 79,000.00 0.65752                    51,943.782
                     94,427.55

NPV of the Project is $94,427.55

Note- PV Factor@15% can be taken from PVAF Table or calculated using this formula which is = 1/(1+0.15)^n

where, n = Respective year.

For example, PV Factor@15% of 2nd year = 1/(1+0.15)^2 = 1/1.3225 = 0.75614

If you need any clarification, you can ask in comments.    

If you like my answer, then please up-vote as it will be motivating       


Related Solutions

4. A project requires an initial investment of $300,000 and expects to produce an after-tax operating...
4. A project requires an initial investment of $300,000 and expects to produce an after-tax operating cash flow of $150,000 per year for three years. The asset value will be depreciated using straight-line depreciation over three years. At the end of the project, the asset could be sold for a price of $100,000. Assume a 21% tax rate and 15% cost of capital. Calculate the NPV of the project.
A project requires an initial investment of $200,000 and expects to produce a cash flow before...
A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of $120,000 per year for two years (i.e., cash flows will occur at t = 1 and t = 2). The corporate tax rate is 21 percent. The assets will depreciate using the MACRS 3-year schedule: (t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can use all...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,300 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 10%. Ignore inflation. a. Calculate project NPV for each company. (Do not...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,800 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 11%. Ignore inflation. A.Calculate project NPV for each company. (Do not round...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,200 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 30% and can depreciate the investment for tax purposes using the five-year MACRS tax depreciation schedule. Suppose the opportunity cost of capital is 8%. Ignore inflation. a. Calculate project...
Consider a project that requires an initial investment of $103,000 and will produce a single cash...
Consider a project that requires an initial investment of $103,000 and will produce a single cash flow of $148,000 in 4 years. What is the NVP of this project if the 4 year interest rate is 5.2% (EAR) ? What is the NPV of this project if the 4 year interest rate is 9.8% (EAR)? What is the highest 4 year interest rate such that this project is still profitable?
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,600 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 9%. Ignore inflation. Calculate the NPV for each company. What is the...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,700 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 11%. Ignore inflation. a. Calculate project NPV for each company. (Do not...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,300 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 40% and can depreciate the investment for tax purposes using the five-year MACRS tax depreciation schedule. Suppose the opportunity cost of capital is 10%. Ignore inflation. a. Calculate project...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,300 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 40% and can depreciate the investment for tax purposes using the five-year MACRS tax depreciation schedule. Suppose the opportunity cost of capital is 10%. Ignore inflation. a. Calculate project...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT