Question
In: Finance
4. A project requires an initial investment of $300,000 and expects to produce an after-tax operating...
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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. |
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The asset value will be depreciated using straight-line depreciation over three years. |
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At the end of the project, the asset could be sold for a price of $100,000. |
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Assume a 21% tax rate and 15% cost of capital. Calculate the NPV of the project. |
Solutions
Expert Solution
| Time line | 0 | 1 | 2 | 3 | |||
| Cost of new machine | -300000 | ||||||
| =Initial Investment outlay | -300000 | ||||||
| 100.00% | |||||||
| Depreciation | Cost of equipment/no. of years | -100000 | -100000 | -100000 | 0 | =Salvage Value | |
| =after tax operating cash flow | 150000 | 150000 | 150000 | ||||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 79000 | |||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||
| =Terminal year after tax cash flows | 79000 | ||||||
| Total Cash flow for the period | -300000 | 150000 | 150000 | 229000 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.15 | 1.3225 | 1.520875 | ||
| Discounted CF= | Cashflow/discount factor | -300000 | 130434.7826 | 113421.5501 | 150571.2172 | ||
| NPV= | Sum of discounted CF= | 94427.55 |
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