Question

In: Finance

what is the NPV of the Project if Dominant Retailer’s WACC is 16.75%? Your company, Dominant...

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

Solutions

Expert Solution

Depreciation Schedule
Year Opening Balance Depreciation Base Depreciation % Depreciation Closing Balance
A B C D E = C*D F = B-E
1 155000 155000 20% 31000 124000
2 124000 155000 32% 49600 74400
3 74400 155000 19.20% 29760 44640
4 44640 155000 11.52% 17856 26784
5 26784 155000 11.52% 17856 8928
Calculation of NPV of the Project
Particulars 0 1 2 3 4 5
Initial Investment
New Equipment Price -155000
After tax sale Value of Machine
($7,000 * (1-25%)		 5250
Investment in Net Working Capital -5000
Net Investment (A) -154750
Operating Cash Flows
Annual Sales (B) 99000 99000 99000 99000 99000
Cash Operating Costs (C ) 49750 49750 49750 49750 49750
Depreciation (D) 31000 49600 29760 17856 17856
Profit Before Tax (E = B-C-D) 18250 -350 19490 31394 31394
Tax @20% (F = E*20%) 3650 -70 3898 6278.8 6278.8
Profit After Tax (G = E-F) 14600 -280 15592 25115.2 25115.2
Add back Depreciation (H = D) 31000 49600 29760 17856 17856
Net Operating Cash Flows (I = G+H) 45600 49320 45352 42971.2 42971.2
Terminal Value
Salvage Value (J) 10750
Book Value (K) 8928
Profit on sale (L = J-K) 1822
Tax @20% (M = L*20%) 364.4
Profit After tax on sale (N = L-M) 1457.6
Add back Book Value (O = K) 8928
Net Terminal Value (P = N+O) 10385.6
Total After Tax Cash Flows (Q = A+I+P) -154750 45600 49320 45352 42971.2 53356.8
Discount Factor @16.75% (R )
1/(1+16.75%)^n n=0,1,2,3,4,5		 1 0.856531049 0.733645438 0.628390097 0.538235629 0.461015528
Discounted Cash Flows (S = Q*R) -154750 39057.81585 36183.39302 28498.74768 23128.63087 24598.31334
NPV of the Project -3283.099

Therefore, NPV of the Project is -$3,283.10

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

If you earn the WACC on a project, (IRR = WACC) or NPV = 0, what...
If you earn the WACC on a project, (IRR = WACC) or NPV = 0, what have you accomplished for your shareholders? 1A. A semiannual bond pays a 4.5 % coupon for the next 27 years. If investors want a 7.3% return, what are they willing to pay for the bond?
What is a pointed purpose of each WACC and NPV?
What is a pointed purpose of each WACC and NPV?
WACC and NPV calculation SHOW ALL WORK !!!! Calculate the Components of WACC and the WACC...
WACC and NPV calculation SHOW ALL WORK !!!! Calculate the Components of WACC and the WACC Use 4 decimals. Cost of Debt:30 year Bonds Current Price 105.5% of par value 7.6 % Coupon Rate Semi Annual Bond 5 years to maturity Tax Rate: 40%. What is the Cost of Debt after tax? Preferred Stock Dividend $7.50 Current Price $60.00. What is the Cost of Preferred? Equity Risk Free Rate 6.50% Market Risk Premium 6.25% Stock Beta 0.7 What is the...
Problem 12-21 WACC and NPV [LO 4] Hankins, Inc., is considering a project that will result...
Problem 12-21 WACC and NPV [LO 4] Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $6.5 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt–equity ratio of .64, a cost of equity of 13.4 percent, and an aftertax cost of debt of 5.9 percent. The cost-saving proposal is somewhat riskier than the usual project...
1A. An investment project is accepted if its NPV is less than its WACC. True False...
1A. An investment project is accepted if its NPV is less than its WACC. True False 1B. An investment project provides all positive cash flows in its economic its life (In this project, first cash flow is negative and rest of the cash flows are positive). However, this project can only be accepted if its IRR is greater than its WACC. True False 1C. A company has financed an investment entirely by issuing a bond. Then, which component of the...
Assume the following CFs, what is the PV, the NPV, and the IRR? Use the WACC...
Assume the following CFs, what is the PV, the NPV, and the IRR? Use the WACC as your required return. What is the most you should pay for the set of cash flows and earn your WACC? WACC is 11.55%. Do not use excel. Year 0 1 2 3 4 5 6 7 Investment -200,000 OCF 50,000 60,000 40,000 70,000 15,000 0.00 -10,000 Terminal CF 78,000
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...
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...
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...
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...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT