Question

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%?

Answer 1

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)