Question

Using the information from problem 16 on Large Manufacturing, Inc., what is the

project’s NPV? Enter your answer rounded to two decimal places. Do not enter $ or

comma in the answer box. For example, if your answer is $12,300.456 then enter as

12300.46 in the answer box

Large Manufacturing, Inc. is considering investing in some new equipment whose data are shown below. The equipment has a 3-year class life and will be depreciated by the MACRS depreciation system, and it will have a positive pre-tax salvage value at the end of Year 3, when the project will be closed down. Also, some new working capital will be required, but it will be recovered at the end of the project's life. Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the project's Initial Cash Outlay at time 0? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

WACC

11.0%

Net investment in fixed assets (depreciable basis)

$70,000

Required new working capital

$10,000

Sales revenues, each year

$95,000

Cash operating costs excl. depr'n, each year

$30,000

Expected pretax salvage value

$9,000

Tax rate

30.0%

Answer 1

Tax rate		30%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3			Total
Cost		70,000.00	70,000.00	70,000.00
Dep Rate		33.33%	44.45%	14.81%
Depreciation	Cost * Dep rate	23,331.00	31,115.00	10,367.00			64,813.00
Calculation of after-tax salvage value
Cost of machine			70,000.00
Depreciation			64,813.00
WDV	Cost less accumulated depreciation	5,187.00
Sale price			9,000.00
Profit/(Loss)	Sale price less WDV	3,813.00
Tax	Profit/(Loss)*tax rate	1,143.90
Sale price after-tax	Sale price less tax		7,856.10
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3
Sale		95,000.00	95,000.00	95,000.00
Less: Operating Cost		30,000.00	30,000.00	30,000.00
Contribution		65,000.00	65,000.00	65,000.00
Less: Depreciation		23,331.00	31,115.00	10,367.00
Profit before tax (PBT)		41,669.00	33,885.00	54,633.00
Tax@30%	PBT*Tax rate	12,500.70	10,165.50	16,389.90
Profit After Tax (PAT)	PBT - Tax	29,168.30	23,719.50	38,243.10
Add Depreciation	PAT + Dep	23,331.00	31,115.00	10,367.00
Cash Profit after-tax		52,499.30	54,834.50	48,610.10
Calculation of NPV
						11.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		(70,000.00)	(10,000.00)		(80,000.00)	1.0000	(80,000.00)
1				52,499.30	52,499.30	0.9009	47,296.67
2				54,834.50	54,834.50	0.8116	44,504.91
3		7,856.10	10,000.00	48,610.10	66,466.20	0.7312	48,599.51
					Net Present Value	60,401.09