Question

Fool Proof Software is considering an expansion project having life for four years. The proposed project has the following features:

• Initial cost of the equipment is $200,000, with shipping cost $10,000 and installation cost of $30,000.
• The equipment will depreciate over 4 years using MACRS at the following rates (33%, 45%, 15%, and 7%) respectively.
• Inventories will increase by $25,000, and accounts payable will rise by $5,000
• The company will sell 100,000 units per year with a price of $2/unit. The company’s total operating cost will
equal $120,000 each year.
• At t=4, the project salvage valve is $25,000.
• The company’s tax rate is 40%.
• The project’s WACC is 10%.

Calculate the net operating cash flow after tax for 2nd year *

$91,200

$90,000

$91,400

$90,200

10. Calculate the net operating cash flow after tax for 3rd year *

$62,300

$62,400

$61,000

$62,000

11. Calculate the net operating cash flow after tax for 4th year *

$54,720

$54,700

$54,740

$53,720

12. Calculate book value of the equipment at termination *

$20,000

$0

$25,000

$40,000

13. Calculate the terminal value at the end of the project *

$40,000

$30,000

$35,000

$25,000

14. Calculate the NPV value of the project *

$23,679

-$4,029.72

$27,953.24

$30,420

15. Should the project be accepted or rejected *

Accept

Reject

Can't determine

Maybe

Answer 1