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Consider a capital expenditure project that has forecasted revenues equal to $80,000 per year; cash expenses...

Consider a capital expenditure project that has forecasted revenues equal to $80,000 per year; cash expenses are estimated to be $25,000 per year. The cost of the project equipment is $120,000, and the equipment’s estimated salvage value at the end of the project is $10,000. The equipment’s $120,000 cost will be depreciated on a straight-line basis to $0 over an 8-year estimated economic life. Assume that the project requires an initial $10,000 working capital investment. The company can recover this working capital investment at the end of the project. The company’s marginal tax rate is 35%. Calculate the project’s net present value using a 14% discount rate.

And please can you solve it with calculations than on excel. Thank you

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Expert Solution

Computation of NPV:
A Initial Cash Outflow:
Purchase of Equipment $           120,000
Net Working Capital $             10,000
PV of Cash Outflows $           130,000
B Terminal Cash Inflows:
a Sale of Equipment at end of Project $             10,000
Less: Book Value $                       -  
Capital Gain $             10,000
Less: Tax @ 35% $                3,500
Net Cash Inflow on Sale of Equipment $                6,500
b Net Working Capital $             10,000
c Termianl Cash Inflow (a+b) $             16,500
PVF(14%,8 yr) = 1.14^(-8) 0.3506
PV of Terminal Cash Inflow $                5,784
C Operational Cash flows
a. Forecasted Revenue per Year $             80,000
b. Annual Cash Costs $             25,000
Depreciation per year ($ 120,000/8years) $             15,000
Expenses for the year $             40,000
c. Profit before Taxation (a-b) $             40,000
d. Less: Tax @ 35% per year $             14,000
e. Profit after Taxation (c-d) $             26,000
Add: Depreciation $             15,000
f. Net Operating Cash Inflows $             41,000
g. PVAF(14%, 8 Years) $             4.6389
h. Present Value of Operational Cash Inflows (f*g) $           190,193
D Computation of NPV
a. Present Value of Operational Cashflows $     190,193.42
PV of Terminal Cash Inflow $          5,784.22
Present Value of Cash Inflows $     195,977.64
b. PV of Cash Outflows $           130,000
c. NPV = PV od Cash Inflows - PV of Cash Outflows $       65,977.64

jeff jeffy answered 1 year ago
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