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Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect...

Eggz, Inc., is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $470,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $72,000 at the end of the project in 5 years. Sales would be $311,000 per year, with annual fixed costs of $56,000 and variable costs equal to 37 percent of sales. The project would require an investment of $43,000 in NWC that would be returned at the end of the project. The tax rate is 24 percent and the required return is 10 percent.

Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Solutions

Expert Solution

Calculation of NPV of project
Year 0 1 2 3 4 5 NPV
Investment in equipment -$470,000.00
Investment in NWC -$43,000.00
Operating Cash flow $219,146.80 $106,346.80 $106,346.80 $106,346.80 $106,346.80
Sale value of equipment $72,000.00
Tax @ 24% on sale value of equipment -$17,280.00
Recovery of NWC $43,000.00
Net Cash flow -$513,000.00 $219,146.80 $106,346.80 $106,346.80 $106,346.80 $204,066.80
x Discount Factor @ 10% 1 0.909090909 0.826446281 0.751314801 0.683013455 0.62092132
Present Value -$513,000.00 $199,224.36 $87,889.92 $79,899.92 $72,636.30 $126,709.43 $53,359.93
NPV of the project = $53,359.93
Working
Calculation of Operating Cash flow
Year 1 2 3 4 5
Sales $311,000.00 $311,000.00 $311,000.00 $311,000.00 $311,000.00
Less : Variable cost $115,070.00 $115,070.00 $115,070.00 $115,070.00 $115,070.00
Less : Fixed Cost $56,000.00 $56,000.00 $56,000.00 $56,000.00 $56,000.00
Less : Depreciation $470,000.00
Profit before tax -$330,070.00 $139,930.00 $139,930.00 $139,930.00 $139,930.00
Less : Tax @ 24% -$79,216.80 $33,583.20 $33,583.20 $33,583.20 $33,583.20
Add : Depreciation $470,000.00 $0.00 $0.00 $0.00 $0.00
Operating Cash flow $219,146.80 $106,346.80 $106,346.80 $106,346.80 $106,346.80

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