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.

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

jeff jeffy answered 1 year ago

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