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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 2 years ago
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