Question

The Perego Company is considering a new equipment which will cost $75,000 today. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero-salvage value, and would require additional net operating working capital of $18,000. The annual sales revenues of the project are $100,000, and annual operating cost except depreciation is $45,000. Revenues and other operating costs are expected to be constant over the project's life. Perego Company tax rate is 35.0% and its cost of capital is 13.35 percent. Next, tell me what is the project's NPV, what the project's MIRR? (Please provide step by step explanation)

Answer 1

Solution:

Annual Depreciation=Cost/Life of asset

=$75,000/3=$25,000

Statement showing cash flows for each year and its present value

Year	0	1	2	3
Revenue		$100,000	$100,000	$100,000
Less:Annual operating cost		$45,000	$45,000	$45,000
Less:Annual Depreciation	0	$25,000	$25,000	$25,000
Income before tax		$30,000	$30,000	$30,000
Less:Tax @35%		$10,500	$10,500	$10,500
Net Income	0	$19,500	$19,500	$19,500
Add:Depreciation		$25,000	$25,000	$25,000
Net Operating Cash flows		$44,500	$44,500	$44,500
Initital Investment	-$75,000
Net Working Capital	-$18,000
Recovery of working capital	0	0	0	$18000
Net After Tax Cash flows(a)	-$93,000	$44,500	$44,500	$62,500
Present value [email protected]%(b)	1	0.8822232	0.7783178	0.686650
Present value(a*b)	-$93,000	$39,258.9324	$34,635.1421	$42,915.625

NPV=Sum of present value of Cash inflows-Sum of present value of Cash outflows

=($39,258.9324+$34,635.1421+$42,915.625)-$93,000

=$23,809.6995

MIRR=Using excel formula,MIRR will be 22.298%