Question

Coffee-Cola is considering a project for a new bottled beverage called Lots-A-Latte. The project would require new assets today costing $320,000 that would be depreciated using 3-year MACRS Depreciation (yr 1: 33%, yr 2: 45%, yr 3: 15%, yr 4: 7%). Additional net working capital of $15,000 would be needed at the beginning of the project’s life and would be recovered at the end of the project. The project has a 3-year expected useful life with an expected salvage value of $90,000 at the end of the 3-year expected useful life. Coffee-Cola expects annual sales of $250,000 and annual operating costs of $110,000 during the 3-year life of the project. Coffee-Cola’s marginal tax rate is 25% and their WACC is 8% Refer to Coffee-Cola, what is the terminal (non-operating) cash flow at the end of year 3 for the Lots-A-Latte project?

Answer 1

Tax rate		25%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Total
Cost		$       320,000	$      320,000	$       320,000
Dep Rate		33.00%	45.00%	15.00%
Depreciation	Cost * Dep rate	$       105,600	$      144,000	$         48,000	$       297,600
Calculation of after-tax salvage value
Cost of machine			$      320,000
Depreciation			$      297,600
WDV	Cost less accumulated depreciation	$        22,400
Sale price			$        90,000
Profit/(Loss)	Sale price less WDV	$        67,600
Tax	Profit/(Loss)*tax rate	$        16,900
Sale price after-tax	Sale price less tax		$        73,100
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3
Sale		$       250,000	$      250,000	$       250,000
Less: Operating Cost		$       110,000	$      110,000	$       110,000
Contribution		$       140,000	$      140,000	$       140,000
Less: Depreciation		$       105,600	$      144,000	$         48,000
Profit before tax (PBT)		$         34,400	$         (4,000)	$         92,000
Tax@25%	PBT*Tax rate	$           8,600	$         (1,000)	$         23,000
Profit After Tax (PAT)	PBT - Tax	$         25,800	$         (3,000)	$         69,000
Add Depreciation	PAT + Dep	$       105,600	$      144,000	$         48,000
Cash Profit after-tax		$       131,400	$      141,000	$       117,000
Calculation of NPV
						8.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$     (320,000)	$       (15,000)		$     (335,000)	1.0000	$     (335,000)
1				$       131,400	$       131,400	0.9259	$       121,667
2				$       141,000	$       141,000	0.8573	$       120,885
3		$         73,100	$        15,000	$       117,000	$       205,100	0.7938	$       162,815
					Net Present Value	$         70,366