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%?
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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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