In: Finance
a. What is the annual depreciation? *** Straight line depreciation expense = (beginning value- ending value) / life expectancy
b. What is the TAX on salvage? *** Taxes on salvage = Tax rate * Capital Gain
C. What is the operating cash flow?
***Operating Cash Flow = (Sales-Costs-Depreciation) – Taxes + Depreciation
or = Net Income + Depreciation
d. What is the project's NPV?
a.
annual depreciation =
-200000 |
b.
tax on salvage = 700000*0.4 = 280000
c.
OCF
=
362000 |
d.
Time line | 0 | 1 | 2 | 3 | 4 | 5 | |
Cost of new machine | -1500000 | ||||||
Initial working capital | -400000 | ||||||
=Initial Investment outlay | -1900000 | ||||||
Sales | 950000 | 950000 | 950000 | 950000 | 950000 | ||
Profits | Sales-variable cost | 570000 | 570000 | 570000 | 570000 | 570000 | |
Fixed cost | -100000 | -100000 | -100000 | -100000 | -100000 | ||
-Depreciation | (purchase price-last yr book value)/5 | -200000 | -200000 | -200000 | -200000 | -200000 | |
=Pretax cash flows | 270000 | 270000 | 270000 | 270000 | 270000 | ||
-taxes | =(Pretax cash flows)*(1-tax) | 162000 | 162000 | 162000 | 162000 | 162000 | |
+Depreciation | 200000 | 200000 | 200000 | 200000 | 200000 | ||
=after tax operating cash flow | 362000 | 362000 | 362000 | 362000 | 362000 | ||
reversal of working capital | 400000 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 420000 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 200000 | |||||
=Terminal year after tax cash flows | 1020000 | ||||||
Total Cash flow for the period | -1900000 | 362000 | 362000 | 362000 | 362000 | 1382000 | |
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 |
Discounted CF= | Cashflow/discount factor | -1900000 | 329090.91 | 299173.554 | 271975.96 | 247250.87 | 858113.3 |
NPV= | Sum of discounted CF= | 105604.56 |
b