Question

2) A firm is undertaking a project with the following details provided.

• The project costs $2 million and has a five-year service life.
• It generates revenues of $600,000 annually.
• The project is classified under a 7-year property under the MACRS rule.
• At the end of the fifth year, any assets held for the project will be sold. The expected salvage value will be 15% of the initial $2M project cost.
• The firm will finance 30% of the project money from an outside source with an annual interest rate of 12%. The firm is required to repay the loan with five equal annual payments.
• The firm’s tax rate is 21%
• MARR is 17%.
• Given the information,
  • Determine the end of year cash flows for years 0 through 5
  • Compute the Net Present Worth for this 5-year project

Year 0_________________

Year 1_________________

Year 2_________________

Year 3_________________

Year 4_________________

Year 5_________________

NPW____________________

Answer 1

Answer:

Year	Revenue	Depreciation %	Depreciation	Interest	Profit before tax=Revenue-Depreciation-Interest	Tax@21%	Profit after tax	Cash flow	PV factor
0	-2000000	-	-						-2000000
1	600000	14.29	285800	34296	279904	58779.84	221124.16	285800	244273.5
2	600000	24.49	489800	58776	51424	10799.04	40624.96	489800	357805.5
3	600000	17.49	349800	41976	208224	43727.04	164496.96	349800	218404.8
4	600000	12.49	249800	29976	320224	67247.04	252976.96	249800	133305.8
5	900000	8.93	178600	21432	699968	146993.3	552974.72	178600	81461.45
Total									1035251

Net present worth=$1035251

Annual loan instalment=$600000(A/P,12%,5)=$600000*0.2774=$164,400.

Interest is calculated as follows:

Loan amount in start of year	Interest	Loan amount in end of year	Yearly payment	Loan amount in end of year
600000	72000	672000	164400	507600
507600	60912	568512	164400	404112
404112	48493.44	452605.44	164400	288205.44
288205.44	34584.65	322790.0928	164400	158390.0928
158390.1	19006.81	177396.912	164400	12996.912