Question

In: Finance

Foley Systems is considering a new investment whose data are shown below. The equipment would be...

Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project’s 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project’s life. Revenues and other operating costs are expected to be constant over the project’s life. What is the project’s NPV? (Hint: Cash flows are constant in Years 1 to 3.) WACC 10.0% Net investment in fixed assets (basis) $75,000 Required new working capital $15,000 Straight-line deprec. rate 33.333% Sales revenues, each year $75,000 Operating costs (excl. deprec.), each year $25,000 Tax rate 35.0%

do not use excel calculate, plz give step detail.

Solutions

Expert Solution

Initial Investment = Net Investment in Fixed Assets + Net working capital required

= $75,000 + $15,000

= $90,000

Depreciation = Investment in fixed assets * Depreciation rate

= $75,000 * 33.333%

= $25,000

Profit After Tax = (Sales revenues - Operating Costs - Depreciation) * (1 - tax rate)

= ($75,000 - $25,000 - $25,000) * (1 - 35%)

= $25,000 * 0.65

= $16,250

Net Operating Cash Flows = Profit After Tax + Depreciation

= $16,250 + $25,000

= $41,250

P = Net Operating Cash Flows = $41,250

P1 = Recovery of net working capital = $15,000

n = 3 years

r = WACC = 10%

Present Value of Cash Inflows = [P * [1 - (1+r)^-n] / r] + {P1 / (1+r)^n]

= [$41,250 * [1 - (1+10%)^-3] / 10%] + [$15,000 / (1+10%)^3]

= [$41,250 * 0.248685199 / 0.10] + [$15,000 / 1.331]

= $102,582.645 + $11,269.722

= $113,852.367

Project's NPV = Present value of cash inflows - Initial investment

= $113,852.367 - $90,000

= $23,852.367

Therefore, Project's NPV is $23,852.37


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