Question

In: Finance

Your company, Dominant Retailer, Inc., is considering a project whose data are shown below. Revenue and...

Your company, Dominant Retailer, Inc., is considering a project whose data are shown below. Revenue and cash operating expenses are expected to be constant over the project's 5 year expected operating life; annual sales revenue is $99,000.00 and cash operating expenses are $49,750.00. The new equipment's cost and depreciable basis is $155,000.00 and it will be depreciated by MACRS as 5 year property. The new equipment replaces older equipment that is fully depreciated but can be sold for $7,000. In addition, the new equipment requires an additional $5,000 of net operating working capital, which can be fully recovered at the end of the project. The new equipment is expected to be sold for $10,750 at the end of the project in year 5. The marginal tax rate is 20.00%.  

what is the NPV of the Project if Dominant Retailer’s WACC is 16.75%?

Solutions

Expert Solution

Computation of intial cash outflow
Cost = 155,000.00
Net working capital 5000
Less : Post tax salvge value -5600
7000*(1-20%)
Initial investmnet 154,400.00
Year Rate Depreciation Accumulated Depreciation Book Value
0 $0.00 $0.00 $155,000.00
1 20.00% $31,000 $31,000 $124,000
2 32.00% $49,600 $80,600 $74,400
3 19.20% $29,760 $110,360 $44,640
4 11.52% $17,856 $128,216 $26,784
5 11.52% $17,856 $146,072 $8,928
Computation of NPV
Year 0 1 2 3 4 5
Investment -149,400.00
Working capital -5000 5000
Revenue $99,000.00 $99,000.00 $99,000.00 $99,000.00 $99,000.00
Cost 49,750 49,750 49,750 49,750 49,750
Depreciation $31,000 $49,600 $29,760 $17,856 $17,856
Profit before tax $18,250.00 ($350.00) $19,490.00 $31,394.00 $31,394.00
Tax @ 20% $3,650.00 ($70.00) $3,898.00 $6,278.80 $6,278.80
Net income $14,600.00 ($280.00) $15,592.00 $25,115.20 $25,115.20
Operating cash flow $45,600.00 $49,320.00 $45,352.00 $42,971.20 $42,971.20
Salvage value
10,750-(10,750-8928)*(20%) $10,385.60
Net cash flow -154,400.00 45,600.00 49,320.00 45,352.00 42,971.20 58,356.80
PVIF @ 16.75% 1 0.85653105 0.73364544 0.628390097 0.53823563 0.46101553
Present value -154400 39057.8158 36183.393 28498.74768 23128.6309 26903.391 -628.022
NPV = $   (628.02)

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