Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $841,900.00 work cell. Further, it will cost the firm $53,800.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $54,800.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $6,900.00. Finally, the firm will invest $10,500.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $911,000.00 with expenses estimated at 38.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 40.00%. The work cell is estimated to have a market value of $472,000.00 at the end of the fourth year. The firm expects to reclaim 85.00% of the final NWC position. The cost of capital is 15.00%. What is the NPV the project if we end the project after 4 years?

Answer 1

1. Initial cost= plant &machinery equipment=$841,900+$53,800=$895,700

Other cost like traing cost for employees=$54,800

ABC corporation saved $6900 for already existing machinery

Other costs=$54,800-$6900=$47,900

Net working capital needed=$10500

Total initial cost (CF0)=$895,700+$47,900+$10,500=$954,100

2.Cash flows and terminal value for Year 1 to Year 4.

For depreciation calculation, we need to take only fixed cost which is a depreciable asset=$895,700

asset life=20 years

depreciation for each year=$895,700/20=$44,785

NPV(15%, Year 1 to year 4 cash flows)-Total cost.

NPV=$231,597, hence they should accept the project