Question

TechSquare. LLC. is considering a 5-year new project. The project will require $325,000 for fixed assets and $95000 of working capital. The fixed assets will be depreciated straight-line to a zero-book value over 5 year. At the end of the project, the fixed assets can be sold for 25% of their original cost. The project is expected to generate annual sales of $554,000 with costs of $430,000. The tax rate is 21% and the required rate of return is 15%. What are the NPV and PI of this project? (5pts) Question 2 - TechSquare. LLC. is considering a 5-year new project. The project will require $325,000 for fixed assets and $95000 of working capital. The fixed assets will be depreciated straight-line to a zero-book value over 5 year. At the end of the project, the fixed assets can be sold for 25% of their original cost. The project is expected to generate annual sales of $554,000 with costs of $430,000. The tax rate is 21% and the required rate of return is 15%. What are the NPV and PI of this project?

Answer 1

Tax rate		21%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Total
Cost		$       325,000	$      325,000	$       325,000	$       325,000	$      325,000
Dep Rate		20.00%	20.00%	20.00%	20.00%	20.00%
Depreciation	Cost * Dep rate	$         65,000	$        65,000	$         65,000	$         65,000	$        65,000	$       325,000
Calculation of after-tax salvage value
Cost of machine			$      325,000
Depreciation			$      325,000
WDV	Cost less accumulated depreciation	$                -
Sale price			$        81,250	325000*25%
Profit/(Loss)	Sale price less WDV	$        81,250
Tax	Profit/(Loss)*tax rate	$        17,063
Sale price after-tax	Sale price less tax		$        64,188
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5
Sale		$       554,000	$      554,000	$       554,000	$       554,000	$      554,000
Less: Operating Cost		$       430,000	$      430,000	$       430,000	$       430,000	$      430,000
Contribution		$       124,000	$      124,000	$       124,000	$       124,000	$      124,000
Less: Depreciation		$         65,000	$        65,000	$         65,000	$         65,000	$        65,000
Profit before tax (PBT)		$         59,000	$        59,000	$         59,000	$         59,000	$        59,000
Tax@21%	PBT*Tax rate	$         12,390	$        12,390	$         12,390	$         12,390	$        12,390
Profit After Tax (PAT)	PBT - Tax	$         46,610	$        46,610	$         46,610	$         46,610	$        46,610
Add Depreciation	PAT + Dep	$         65,000	$        65,000	$         65,000	$         65,000	$        65,000
Cash Profit after-tax		$       111,610	$      111,610	$       111,610	$       111,610	$      111,610
Calculation of NPV
						15.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0		$     (325,000)	$       (95,000)		$     (420,000)	1.0000	$     (420,000)
1				$       111,610	$       111,610	0.8696	$         97,052
2				$       111,610	$       111,610	0.7561	$         84,393
3				$       111,610	$       111,610	0.6575	$         73,385
4				$       111,610	$       111,610	0.5718	$         63,813
5		$         64,188	$        95,000	$       111,610	$       270,798	0.4972	$       134,634
					Net Present Value	$         33,278
Calculation of PI	Sum of PV of inflows/Outflow
Calculation of PI	453278.35/420000
Calculation of PI	1.08