Question

In: Finance

Year 0 Year 1 Year 2 Year 3 Year 4 Revenue 120000 440000 440000 330000 Cost...

Year 0

Year 1

Year 2

Year 3

Year 4

Revenue

120000

440000

440000

330000

Cost of Goods Sold

-60000

-220000

-220000

165000

Gross Profit

60000

220000

220000

165000

Selling, General and Admin

-7000

-7000

-7000

-7000

Depreciation

-80000

-80000

-80000

-80000

EBIT

-27000

133000

133000

78000

Income tax (35%)

9450

-46550

-46550

-27300

Incremental Earnings

-36450

86450

86450

50700

Capital Purchaes

-280,000

Change to NWC

-5,000

-5,000

-5,000

-5,000

A garage is installing a new​ "bubble-wash" car wash. It will promote the car wash as a fun activity for the​ family, and it is expected that the novelty of this approach will boost sales in the medium term. If the cost of capital is 88​%,by using the data in the table​ above, calculate the net present value​ (NPV) of this project.

Solutions

Expert Solution

NPV = sum of present values of FCF

FCF in each year = incremental earnings + depreciation - capital purchases - change to NWC

In year 1, EBIT is negative. Therefore, taxes should be positive, and these are a cash inflow since there is a reduction in tax expense. This will offset the negative EBIT to increase the incremental earnings. Therefore, this adjustment needs to be done in Year 1.

present value of each FCF = FCF / (1 + cost of capital)n

where n = number of years after which the cash flow occurs

NPV = 124,256

jeff jeffy answered 2 years ago
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