Question

Data Mining is considering an expansion project. The company’s management has decided that the initial cost of the project is $300,000 with an additional installment cost of $80,000. The project life is four years, during it’s life the project will depreciate based on the following rates:
• 1st year 33%
• 2nd year 45%
• 3rd year 15%
• 4th year 7%
Management has also decided that an additional of $45,000 in inventories and $12,000 in accounts payable needed if the project taken today. During the next four years, the expected quantity of merchandise to be sold each year is 15,000 units at a price of $50 per unit. The project’s fixed cost and total variable costs estimated to be $350,000. The project has been assigned a salvage value of $45,000 at it’s end life after four years and the weighted average cost of capital of 10%.
*tax rate is 40%.

Based on the company’s information, the fixed capital investment(Depreciable Basis) is *

$300,000

$380,000

$220,000

$400,000

2) The change in net working capital is : *

$33,000

$45,000

$57,000

$47,000

3) Then, initial investment (I0) can be calculated as : *

$410,000

$412,000

$413,000

$415,000

4) The depreciation of the 1st year is *

$120,300

$125,400

$130,300

$116,000

5) The depreciation of the 2nd year is

$150,000

$171,000

$154,000

$183,000

6) The depreciation of the 3rd year is *

$57,000

$49,000

$40,000

$41,000

7) The depreciation of the 4th year is *

$26,200

$26,300

$26,500

$26,600

8) The the net operating cash flow after tax for the first year is *

$290,160

$285,700

$290,700

$285,900

9) The the net operating cash flow after tax for the second year is *

$255,000

$308,400

$450,600

$460,000

10) The net operating cash flow after tax for the third year is *

$250,000

$352,100

$262,800

$360,000

11) The the net operating cash flow after tax for the 4th year is *

$200,440

$300,360

$400,000

$250,640

12) The Book Value of the fixed asset at the termination after four years is *

$49,200

$0

$45,000

$45,200

13) The termination value at the end life of the project is calculated as *

$45,000

$77,760

$78,000

$$60,000

14) The NPV of the project is equal to *

$458,157.4

$645,998.5

$515,274.7

-$252,998.2

15) In conclusion, what is your decision regarding the project *

Reject the project

Accept the project

Can't determine

either accept or reject based on economic conditions

Answer 1

Based On Information Given, Answer should be :

1) the fixed capital investment(Depreciable Basis) is
the initial cost of the project with an additional installment cost
= $300,000 + $80,000. =$380,000 (Option B is Right)

2) The change in net working capital is
an additional of inventories by Management, If Project taken today,
= $45,000 (Option B is Right)

3) Then, initial investment (I0) can be calculated as
= Fixed capital Investment + Changes In Net Working capital
= $ 380,000 + $ 45,000 = $425,000 ( I think Option D Should Be 425,000 instead of 415,000)

4) The depreciation of the 1st year is
= Fixed capital Investment * Depr. rate For First year
= $ 380,000 * 33%
= $ 125,400 (Option B is Right)

5) The depreciation of the 2nd year is
= Fixed capital Investment * Depr. rate For Second year
= $380,000 * 45%
= $171,000 (Option B is Right)

6) The depreciation of the 3rd year is
Fixed capital Investment * Depr. rate For Third year
= $380,000 * 15%
= $57,000 (Option A is Right)

7) The depreciation of the 4th year is
Fixed capital Investment * Depr. rate For fourth year
= $380,000 * 7%
= $26,600 (Option D is Right)

8) The the net operating cash flow after tax for the first year is (Based on image table)
=
9) The the net operating cash flow after tax for the second year is (Based on image table)
=
10) The the net operating cash flow after tax for the third year is (Based on image table)
=
11) The the net operating cash flow after tax for the fourth year is (Based on image table)
=
12) The Book Value of the fixed asset at the termination after four years is
= Zero (Due to 100% Depriciation of assets into Four Years)
          *(Assumtion Is Depriciation Based SLM, Not WDV)

13) The termination value at the end life of the project is calculated as
= $ 45,000 Which is salvage value itself (Option A)

14) The NPV of the project is equal to
= $537,980.96

15) In conclusion, what is your decision regarding the project
= Accept the project in view of positive NPV...